In previous Social Security Talking Points installments, some basics and advanced concepts of Social Security were introduced. This fifth and final installment will discuss Social Security provisions relating to Public Employees along with the taxation of Social Security benefits. The purpose of this five-part series is to embolden the advisor to be proactive, not reactive in assisting clients with their Social Security options. The advisor is the clients’ trusted advisor and must be prepared for clients’ questions on Social Security?
Public Employees (WEP/GPO)
In Ohio, 97.5 percent of public employees are not covered by Social Security. These employees pay into a government pension plan and do not pay Social Security taxes on their earnings. Clients that work in state, local, and county jobs might pay into an alternative pension plan and be subject to the Windfall Elimination Provision (WEP) as well as the Government Pension Offset (GPO). Federal employees that were hired prior to 1978 are also subject to these provisions. Twenty-five percent of our clients are subject these provisions as we are based on Ohio.
The Windfall Elimination Provision applies if your clients are eligible for a public employee pension and a Social Security benefit based on their own work record. The WEP applies when your clients have engaged in both types of employment. In 2017 the maximum reduction of Social Security benefits is $447. Please note that the estimated benefits on the Social Security statement have not been adjusted for WEP. Being subject to WEP will never reduce the client’s Social Security benefit to zero. The client will always receive a Social Security benefit even if subject to the Windfall Elimination Provision. Clients that have 30 years of more of “Substantial Earnings” will receive their full Social Security benefit.
Government Public Offset applies when clients are eligible for a public employee pension and a Social Security benefit off a spouse’s record. The GPO applies to Social Security based on a current spouse, a divorced spouse, or a surviving spouse.
The Government Public Offset frequently reduces Social Security benefits based on a current, divorced or deceased spouse to zero. Pursuant to GPO, Social Security benefits based on someone else’s work history must be reduced by two-thirds of the public employee pension. Social Security will pay the amount after applying the offset. Frequently, two-thirds of the public employee pension will completely offset potential Social Security benefits resulting in no benefits based off of a spouse.
Please note that WEP and GPO only apply when receiving a pension from work not covered by Social Security. Delaying the public employee pension may allow for a larger Social Security benefit.
A detailed discussion of WEP and GPO is beyond the scope of this article. We cover the complexities of these provisions during our National Social Security Advisors certificate training. For additional information on the NSSA, please contact me at email@example.com.
The Advisor’s Role – understand provisions that impact public employees and the opportunities to avoid reductions to Social Security benefits and to implement planning strategies.
Taxation of Benefits
Here we go, our final topic, the Federal taxation of benefits. How exciting! The good news is that the percentage of Social Security benefits subject to Federal taxation will not exceed 85 percent of a beneficiary’s total Social Security benefits. The amount subject to Federal tax is based on a concept known as “Provision Income.” In summary, Provision Income is computed as follows:
- Adjusted Gross Income (AGI) prior to Social Security benefits
- Plus adjustments such as tax exempt muni bond interest income
- Plus one-half of SS benefits
Equals Provisional Income
If joint income tax return is being filed and Provisional Income does not exceed $32,000 then no Social Security benefits are subject to Federal income tax. If Provision Income ranges between $32,001 – $44,000 then up to 50% of Social Security benefits may be taxable. Finally, if Provision Income exceeds $44,000, then up to 85% of Social Security benefits may be taxable. These income levels are not adjusted for inflation, thus more of clients will be subject to Federal (and possibly state) income taxes with each passing year.
As you can imagine, it is not difficult to fall in the $32,001 – $44,000 range so the majority of your clients will be including some of their Social Security benefits in Federal taxable income. Frequently, additional income will move your client into the 85 percent range. MRD, lottery/gambling winnings, annuity distributions and capital gains are some of the sources of income that may result in 85 percent of a client’s Social Security benefits being taxable. Clients do not want to hear that they might be paying additional tax on their benefits after winning at the casino. Good news for future funding of the Social Security trust fund – revenue collected from taxation of benefits is credited to the Social Security trust fund.
The Advisor’s Role – understand how Social Security benefits are taxed and review strategies to minimize taxation of benefits.
The purpose of this series, was to provide an overview of the topics Social Security is not a difficult program. Advisors often do not take time to understand Social Security.
With 76 million baby boomers understanding Social Security is imperative. You are the trusted advisor. Take the time to learn!
(Marc Kiner is the co-author of 2017 Social Security and Medicare Facts, published by The National Underwriter Company, a division of ALM Media, and available for purchase here. Kiner is also the co-founder of National Social Security Advisors, LLC, which provides education, training and certification for Social Security consulting.)
— Check out other Social Security Talking Points installments by Marc Kiner.