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FINANCIAL PLANNING |
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PERSPECTIVES |
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Will
your future social security payments be smaller than expected?
| January 2005 |
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Your future Social Security payments might be smaller
than expected—more than $300 a month smaller in some
cases—and you might not even realize it.
Are you entitled to receive pension benefits from a job in
which you pay no Social Security taxes, such as work for the
federal government under the Civil Service Retirement
System, your state government, or for an employer in another
country? Yet you’ve also worked part-time or gone into a
second career where you paid Social Security taxes and will
some day be eligible for benefits? Then those Social
Security benefits (including disability benefits) might be
smaller than you anticipate because of what’s called the
Windfall Elimination Provision.
Around for over 20 years, WEP is designed to take away some
of the “double dipping” a worker might receive who accrues a
small or modest amount of Social Security benefits while
working primarily in jobs not covered by Social Security.
That’s because Social Security benefits are skewed more
heavily toward low wage earners.
The law exempts some workers from WEP. Those hired by the
federal government after 1983 are not subject to the
limitation because they are under the Federal Employees
Retirement system, which pays Social Security taxes. Also
exempt are those whose non-covered work occurred before
1957, whose only pension is based on railroad employment, or
who have managed to accumulate 30 or more years of
“substantial earnings” under Social Security.
But many workers, particularly those in their 50s or 60s
with long careers in government, remain affected by the
Windfall Elimination Provision and they don’t realize it. As
a consequence, they often are less financially prepared for
retirement than they might think. Currently, for example,
the annual retirement benefit estimates that Social Security
sends to workers don’t reflect any potential benefit loss
due to WEP.
To better inform future Social Security recipients, the
Social Security Protection Act of 2004 included two
provisions. Starting this year, employers not covered under
Social Security will be required to inform new hires moving
from jobs that paid into Social Security about WEP and its
potential impact on their future Social Security benefits.
Starting in 2007, the Social Security Administration must
inform those potentially subject to WEP how much their
benefits might be reduced.
How can you determine in the meantime whether and how much
the Windfall Elimination Provision might affect you? Start
with what Social Security calls “substantial earnings.” Each
year, Social Security publishes the minimum amount of
earnings necessary to qualify for a full year’s credit of
“substantial earnings.” For example, in 2004 a worker needed
to earn $16,275 to qualify. In 1984, the amount was $7,050.
If you can accumulate 30 years of qualified “substantial
earnings,” such as through side jobs or years of full
employment in jobs paying Social Security tax, you won’t be
hit by WEP. But if you have less than 30 years of
substantial earnings, WEP will reduce benefits. Let’s say
you retire at age 65 with 20 years of substantial earnings
and you’re eligible for $1,000 in monthly Social Security
retirement benefits. According to Social Security tables,
your monthly benefits would be reduced by $306. With 25
years of substantial earnings, you’d lose $153 monthly.
The WEP limits the reduction of Social Security benefits to
no more than 50 percent of the benefits you receive from a
non-Social Security pension. This helps workers with small
pensions. For example, if your non-covered pension is $400,
the reduction in Social Security benefits would be no more
than $200, even if benefits would have been reduced more
than that under the standard WEP tables.
Also keep in mind that the amount your Social Security
benefits are reduced remains the same every year. That is,
if you lose $153 in monthly benefits your first year of
collecting Social Security, then you’ll never lose more than
that amount in the future, even though your overall Social
Security payments rise due to annual inflation adjustments.
While disclosure of the impact of the Windfall Elimination
Provision will better alert future retirees, financial
planners caution workers to keep one key point in mind: if
you believe you will fall under WEP, you need to adjust your
retirement plans and savings efforts accordingly to make up
the shortfall
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(This column is produced by the Financial Planning Association, the
membership organization for the financial planning community, and is
provided by Fredrick J. Livingston, CFP®, Planmark Capital
Management, LLC and he is a Registered Principal with, and offers
securities through, Linsco/Private Ledger, Member NASD/SIPC.)
The opinions voiced in this material are for general information
only and are not intended to provide specific advice or
recommendations for any individual. To determine which investment(s)
may be appropriate for you, consult with your attorney, accountant,
financial advisor, or tax advisor prior to investing.
All performance referenced is historical. All indexes are unmanaged
and cannot be invested into directly.
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