Social Security is a cornerstone of retirement planning for millions of Americans, and financial advisors play a key role in helping clients maximize their benefits. However, not all retirees are treated equally under the Social Security system. For individuals who worked in both “covered” jobs (which paid into Social Security through payroll taxes) and “non-covered” positions (which did not), provisions like the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) have long reduced Social Security payments, creating financial planning challenges.
With the recent legislative progress of the Social Security Fairness Act, the potential repeal of these provisions could provide a significant financial boost for affected retirees. Here’s what this means for retirees and the broader Social Security system.
The Background: WEP and GPO
How WEP Works
The Windfall Elimination Provision (WEP) reduces Social Security benefits for individuals who receive a pension from “non-covered” employment, such as many state and local government positions or certain federal jobs before 1984. The WEP also reduces Social Security benefits for those having less than 30 years of substantial earnings under Social Security; this commonly impacts U.S. citizens who moved to Canada in their 20s, 30s, or early 40s and worked for less than 30 years in the U.S. These U.S. citizens will collect their full Canada Pension Plan (CPP), but a reduced Social Security amount as a result of the WEP.
The Role of GPO
The Government Pension Offset (GPO) reduces spousal or survivor Social Security benefits for those receiving a “non-covered” pension. For example, a widow or widower who worked in a public sector job with a pension might see their survivor benefits reduced by two-thirds of their pension amount.
While WEP and GPO have saved billions for the Social Security system since their implementation more than 40 years ago, they have drawn criticism from public-sector employees and unions, who argue that these provisions unfairly penalize workers with mixed “covered” and “non-covered” career histories.
The Social Security Fairness Act
Legislative Progress
A bipartisan coalition has pushed forward the Social Security Fairness Act, which would repeal both WEP and GPO. The legislation has gained significant momentum, advancing through a procedural Senate vote with strong bipartisan support. If passed and signed into law, the Act would deliver an immediate and retroactive increase in benefits for many retirees. On December 21, 2024, the Senate passed the Act without amendment, so it now moves to President Biden for his signature.
Financial Impacts on Beneficiaries
- For Individuals Affected by WEP: Social Security benefits would increase by an average of $460 annually starting in 2025, with retroactive payments for 2024.
- For Spouses Impacted by GPO: Some could see benefit increases exceeding $1,000 annually by 2033.
This change would directly impact retirees who have long been subject to reduced benefits, providing greater financial security in retirement.
Challenges and Broader Implications
Cost to the Social Security System
The repeal of WEP and GPO comes with an estimated cost of $196 billion over the next decade. This expense could accelerate the depletion of the Social Security trust funds, currently projected to be exhausted by 2035. The influx of higher payments may move the exhaustion date even closer, raising concerns about long-term solvency.
Interaction with Other Proposals
Adding to the potential strain on the system, President-elect Trump and other Republicans have proposed making Social Security benefits tax-free. If combined with the repeal of WEP and GPO, these measures would create additional untaxed benefits, further challenging the program’s financial stability.
Future Policy Adjustments
While these changes would benefit current retirees, they also highlight the need for systemic reforms to maintain Social Security’s long-term viability. Possible solutions include:
- Raising payroll taxes to increase revenue.
- Increasing the full retirement age.
- Implementing targeted benefit reductions for higher earners.
Opportunities for Affected Retirees
The repeal of WEP and GPO would provide significant financial relief for retirees with “non-covered” employment histories. It appears that affected individuals should automatically receive their higher amount of Social Security, although this could likely take at least a few months to implement. Some items to think about include:
- Revisiting Social Security Strategies: Reassess claiming strategies to account for higher benefits.
- Incorporating Retroactive Payments: Plan for and utilize retroactive benefits effectively.
- Maximizing Tax Efficiency: While Social Security benefits may become tax-free, keep up-to-date and plan for potential changes to tax laws or benefit adjustments, and how these may fit into your overall financial plan.
Conclusion
The potential repeal of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) marks a significant development in Social Security policy, offering a welcome financial boost to many retirees. However, the long-term costs of these changes raise important questions about the sustainability of the Social Security system. For retirees and their advisors, this is a pivotal moment to reassess financial plans, optimize benefits, and prepare for future changes that may impact retirement security. By staying informed and proactive, Cardinal Point can help you navigate these changes and secure your financial future in an evolving policy landscape.