How public employees can double-dip in Social Security.

And why the “Social Security Fairness Act” is anything but.

New reports indicate that Senate Majority Leader Chuck Shumer (NY) has promised a vote by December 20 on the Social Security Fairness Act, legislation that would repeal anti-double-dipping rules that prevent certain public sector employees from receiving an unduly sweet deal from Social Security.

Don’t like how I framed that? That’s fine. I’ve tried being reasonable, explaining the rationale behind Social Security’s Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP) in more value-neutral terms. Many public employees really do believe they’re being cheated. But that’s because they really don’t understand Social Security.

The reality is that, lacking the GPO and WEP rules, certain state and local government employees would be offered the opportunity to double-dip on Social Security. That’s not fair to everyone, and it’s costly — nearly $200 billion over 10 years. Passing the Social Security Fairness Act would be nuts.

But, based on my mailbag, many public sector employees find it difficult to understand why these rules exist in the first place. So I’ve written up two quick-and-dirty examples illustrating how state and local government employees who don’t participate in Social Security could receive better treatment than people whose main jobs are covered by the program, and why the GPO and WEP rules exist to restore equal treatment. The provisions are complex and have various exemptions and modifications. Here I’m simply trying to show why these provisions need to exist in the first place.

The Government Pension Offset

The GPO addresses Social Security’s spousal benefit. Under Social Security, each retiree receives a benefit based upon their own earnings record. However, if the benefit of the lower-earning spouse in a couple is less than half that of the higher-earning spouse, Social Security provides a spousal supplement that brings the lower-earning spouse’s benefit up to no less than half that of the higher-earning spouse’s. However, if the lower-earning spouse’s earned benefit is one-half or greater than that of the higher-earning spouse, no spousal benefit is paid.

To illustrate, imagine the higher-earning spouse received $2,000 per month from Social Security. If the lower-earning spouse’s earnings entitled her (it’s still usually a her) to $750 per month, she would receive a $250 spousal supplement to bring her total monthly benefit to $1,000. But if her earnings were high enough to entitle her to $1,250 per month, she would receive that amount but no spousal benefit. Millions of seniors are subject to those rules.

Now imagine that the lower-earning spouse worked in a public sector job that didn’t participate in Social Security. She instead became entitled to a public sector pension benefit. Let’s call it $1,250 per month. Without the Government Pension Offset, she could collect both her own $1,250 pension benefit and a $1,000 Social Security spousal benefit based on her husband’s earnings record, making her $1,000 per month better off than a similar person who participated in Social Security throughout her career. One thousand dollars per month over a 20-year retirement is a lot of money.

That’s an unfair advantage, and that’s why the GPO exists. The GPO would reduce her spousal benefit by two-thirds of the amount of her government pension benefit. In this case, her spousal benefit of $1,000 would be reduced by $825, to $175 per month. But note: this is still more than she would have received had she paid into Social Security over her full career. Now, had her government pension been higher, it’s possible the entire spousal benefit would be eliminated. But if she had paid into Social Security and received $1,250 per month on her own earnings record, her spousal benefit would be entirely eliminated anyway.

The Windfall Elimination Provision (WEP)

The WEP affects the Social Security benefits of workers who receive both a pension from a non-covered job and a Social Security benefit based on their own earnings.

To illustrate, imagine two workers, each of whom had a main job where they earned $85,000 per year throughout their career. One of them worked in a Social Security-covered job while the other was a government employee didn’t participate in Social Security but had a separate pension plan.

Now imagine that each has a part-time job or a side hustle where they earn an average of a $10,000 each year in a job that’s covered by Social Security. Maybe they were teachers who could take on a summer job, or they drove an Uber on the weekends. Lacking the Windfall Elimination Provision, the employee whose main job wasn’t under Social Security would receive a much better payback on those $10,000 in Social Security-covered earnings than the other worker who always paid into the system.

Here's why. For individuals turning age 62 in 2024, Social Security replaces 90% of their first $1,174 in career-average monthly earnings, 32% of earnings between $1,174 and $7,078, and 15% of earnings from $7,078 to the maximum amount subject to Social Security taxes. In other words, your first earnings are replaced at a much higher rate than your final earnings. This progressive formula provides individuals with low lifetime earnings a far higher return on their Social Security taxes than those with higher lifetime earnings.

Now think how our two workers would be treated. The individual who worked only in Social Security-covered jobs would receive an annual benefit of $35,360 based on their base salary of $85,000. The first $14,088 in average annual earnings would be replaced on a 90% basis, the next $70,848 on a 32% basis, and the final $64 in annual earnings on a 15% basis. Their $10,000 in additional earnings from part-time work would boost their benefit by only $1,500 per year, because it falls into the lowest 15% replacement area.

Now consider the employee who worked mostly in a non-covered job, earning the same $85,000 base salary. They’d receive their own government pension benefit, which is usually higher than what Social Security would provide, but we’ll ignore that for now. What matters is the Social Security benefit they’d earn on their $10,000 in Social Security-covered earnings from their part-time job. Since Social Security’s benefit formula doesn’t see their first $85,000 in annual earnings, it treats that $10,000 as the only earnings the employee receives – and as a result, they get a much higher payback on it. Thinking this government employee is actually very poor, Social Security would replace 90% of that $10,000 in additional earnings, generating a $9,000 annual Social Security benefit.

Even in the unlikely event that the public sector worker’s government pension paid the same annual benefit as Social Security would have, the public employee would end up $7,500 per year better off than the employee who worked a full career under Social Security.

When one person with the same lifetime earnings gets a much better deal from Social Security than another, that’s called a windfall. And that’s why the Windfall Elimination Provision exists.

The WEP reduces Social Security’s 90% replacement factor to 40%, with smaller reductions for individuals with 20 or more years of earnings under Social Security. So, in this example, the employee with a non-Social Security government pension would still come out ahead, just by not as much.

An additional way public employees benefit when not covered by Social Security

Everyone knows that Social Security is underfunded. While the retirement of the Baby Boomers and rising longevity may be what pushes the program into insolvency – the retirement trust fund is projected to run dry in 2033, triggering a 21% benefit cut – the larger reason is that early generations of retirees received much, much more in Social Security retirement benefits than they had paid in taxes (including interesting on those taxes). Had earlier generations received back benefits in proportion to their taxes plus a reasonable rate of interest, the Social Security trust fund balance would be much larger and Americans participating in it today would not face the immediate threat of higher taxes and/or lower benefits.

Regardless, the fact that Social Security was such a good deal to early retirees means that, like a tetter-totter, it will be less than a good deal for later ones. That worse deal is like a tax on people participating in Social Security.

And here’s the key point: if you don’t participate in Social Security, you don’t have to “pay” that tax. A public employee who isn’t covered by Social Security may nevertheless have parents or grandparents who were and whose great deal through Social Security resulted in the poorer deal the program offers to Americans today. But the non-covered employee isn’t on the hook for that “legacy debt.” They participate in a government pension program that offers participants a much, much higher return on their contributions. Moreover, when those government pensions become underfunded, as they usually do, the government rather than the employee is on the hook for shortfall.

So, even with the GPO and WEP rules, an employee is still usually better off working in a non-Social Security covered job than under Social Security, since it lets them avoid the collective burden of bringing the program back to solvency.

Takeaways

The WEP and GPO provisions aren't perfect. They were devised at a time when the Social Security Administration did not have data on retirees’ earnings from non-covered employment, and so a rough-and-ready set of rules had to be devised. These rules are about right on average and, as shown in these examples, even after the WEP and GPO are applied many public employees would still receive a windfall.

Nevertheless, the SSA now has data on public employees’ non-covered earnings and some policymakers have devised reforms to the WEP and GPO that would make them more accurate. I’m all for that.

But that’s not what the Social Security Fairness Act does. It simply repeals the WEP and GPO rules and restores Social Security windfalls to public employees who don’t participate in the program. That’s unfair and it’s costly and most of the windfalls would go to higher-income retirees anyway. Sorry, count me out.