Social Security Fairness Act: What It Means for Retirees and How It Will Impact Benefits?

The Social Security system in the United States can be incredibly confusing. I often joke when teaching Social Security classes for certified public accountants (CPAs), saying, “At your FRA, you’re entitled to your PIA, which is based on your AIME, unless you delay, at which point you need to factor in DRCs and COLAs.”

For many, this list of acronyms can be overwhelming. FRA stands for Full Retirement Age, PIA is Primary Insurance Amount, AIME is Average Indexed Monthly Earnings, DRC is Delayed Retirement Credits, and COLA refers to Cost of Living Adjustments.

But that’s not all. There are two other acronyms worth knowing: WEP (Windfall Elimination Provision) and GPO (Government Pension Offset).

Luckily, the Social Security Fairness Act (SSFA), signed into law on January 5, has eliminated these two provisions. For many financial advisers who never fully understood them, this is a big relief.

More importantly, it’s great news for retirees who were previously receiving reduced Social Security benefits due to either the WEP or GPO. Let’s dive into what these provisions were and how they will be affected by the new law.

What Were the WEP and GPO?

Windfall Elimination Provision (WEP): The WEP reduced Social Security benefits for individuals who worked for an employer where they paid into a pension plan instead of Social Security. This was meant to prevent people from receiving more Social Security benefits than they were eligible for due to their non-Social Security-covered work.
Government Pension Offset (GPO): The GPO impacted people who were eligible to receive spousal or survivor Social Security benefits, but also received a pension from a job that didn’t pay into Social Security. In short, it reduced or eliminated these additional benefits.

Who Will Be Affected by the Change?

Social Security Fairness Act: What It Means for Retirees and How It Will Impact Benefits?

The Social Security Administration (SSA) estimates that the new law will impact over 3 million people.

However, there’s a catch: the law doesn’t provide any extra funding for the SSA to handle the increased workload.

This could lead to delays, so it’s a good idea to check with an advisor or the SSA to see if you’re affected.

One of the key groups affected is those who have worked in jobs where they didn’t pay into Social Security but received a pension from that employer.

For instance, federal workers under the Civil Service Retirement System (CSRS) could be impacted. Employees of certain state or local governments may also be affected.

A Real-Life Example

Here’s an example to help explain how the changes might affect you. Let’s say you worked part-time in retail and other service jobs during high school and college.

During that time, you paid Social Security taxes. After graduation, you started working for the federal government, but since you were in the CSRS, you didn’t pay into Social Security for the next 30 years.

After leaving the federal government, you worked as a consultant and again paid into Social Security.

Before the SSFA, you would have received a reduced benefit because of your non-Social Security-covered federal work. However, thanks to the SSFA, your Social Security benefit will no longer be reduced.

Similarly, if you’re eligible for spousal or survivor benefits but haven’t received them because of a non-Social Security-covered pension, you will also see benefits under the new law.

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What to Do if You’re Affected?

If you are one of the individuals impacted by the SSFA, the changes are likely to affect your income in various ways.

With higher Social Security benefits, your tax picture may shift. For example, you may need to withdraw less from other retirement accounts, affecting your long-term financial plans.

The new law will apply retroactively to January 2024, so many retirees have already started receiving higher payments. If you haven’t done so already, it’s important to ensure that your information with the SSA is up to date, including your address and direct deposit details.

For those who have never applied for Social Security benefits because they didn’t qualify for benefits before the SSFA, the SSA recommends applying as soon as possible.

You can apply for Social Security benefits online, but if you’re seeking survivor benefits, you’ll need to call the SSA at 1-800-772-1213.

Conclusion

The Social Security Fairness Act brings positive news for retirees affected by the WEP and GPO. The changes are likely to lead to increased benefits for many people who have worked in non-Social Security-covered jobs or received pensions from such employers.

While the SSA may face some challenges in handling the increased workload, it’s clear that the SSFA will have a major positive impact on millions of Americans.

Reference

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