I’ve seen WEP misunderstood and miscalculated by Social Security employees. So while I agree with the principle this, at least this battle will no longer have to be fought.
Do you have any idea as to *why* the Average Wage Index is used to adjust historical earnings for each worker when calculating AIME? It seems to overstate the adjusted historical wage. Why not use the Median Wage Index?
Or has there ever been a discussion of calculating an "AIME" but only for years where paid into Social Security and then multiplying by a "years of service" as part of the PIA calculation?
So instead of dividing by 420 months [35 years * 12 months], the AIME would *ONLY* be divided by the number of years or months of "covered" earnings? and then multiply that by some amount such as (years of covered earnings / 35 years). In some sense this would be more like a traditional pension calculation (i.e. 1% of average final salary * years of service).
Actually, I don't think that either should be used. Instead, past earnings should be adjusted for inflation, since that provides a more accurate picture of the purchasing power that people had during their working years. Indexing past earnings for the growth of national average wages credits people with more past earnings than they actually had.
Where this comes into play is in calculating Social Security's replacement rates. Typically, it's said that Social Security replaces about 40% of your pre-retirement earnings. Since financial planners say that you'd want a total replacement rate of around 70% of your pre-retirement pay, a person seemingly has to make up the other 30% on their own.
However, the stated 40% replacement rate is actually your benefit as a percentage of your WAGE-INDEXED pre-retirement earnings, which are around 20% higher than the actual purchasing power of your wages. So, in reality, Social Security replaces more of a typical retiree's pre-retirement standard of living than you might think.
Hi Andrew! Thank you for explaining clearly what even most SSA employees sadly do not understand about WEP and GPO. Since my mother and all of her teacher friends are directly affected and will never understand or accept what you have outlined in terms of facts, I think there’s something else going on here.
The Social security statement has a bit of stock language about these provisions as you know, which no one pays attention to. Meanwhile, public sector employees are being misled by the very data in the statements they receive from the agency. SSA should work with IRS to create a more meaningful statement for affected individuals, or maybe not send any statement at all. It would be better not to provide any estimate than to provide an inflated one. One that incorrect estimate gets into the hands of a real person, one that incorrectly assumes no non-pensión at play, they will forever see any divergence from that as a deep “cut” in their benefit. It’s also very startling and unfair to send out these statements and then blindside someone when they finally apply for benefits. Who wouldn’t be angry if you were told x for decades and now you’re being told y?
So we are basically creating and perpetuating the confusion that is leading to this misguided legislation. The policy is challenging to understand for even agency employees who administer the program (see FB thread “For Active and Retired SSA employees”). so should we really expect the public to understand after we mail them a misleading statement year after year?
My point is that if this is important enough for legislators to push along this far, and hopefully no farther, it should be important enough to fix one of the root causes of the confusion, and modify the statement at the very least.
"As a result, public employees would receive a better return on their Social Security contributions than people with similar lifetime earnings who paid into Social Security throughout their lives. That’s unfair – duh – and the WEP and GPO rules exist to prevent this unfairness from happening. "
If I pay into Social Security for 10 years and my average yearly indexed earnings is $50k a year, my AIME is $1190. Right at the top of the first bend point of .90, thus my PIA is roughly $1070
If John pays into Social Security for 20 years with an average yearly indexed earnings of $25k a year his AIME is $1190 and his PIA is also $1070.
If Jenny pays into Social Security for 35 years with an average yearly indexed earnings of $14,285 her AIME is also $1190 and her PIA is....you'll never guess, $1070 too.
How is the worker who also has a pension getting any benefit above and beyond what his contribution into Social Security was relative to anyone else? He's literally getting the exact same amount.
Are we going to make the same "unfair" argument in that Jenny is receiving a Social Security benefit equal to John and me even though she paid into the system for 35 years whereas John and I only paid in for 10 and 20 years respectively?
I doubt it.
Did the person pay his fair share into the system or not? If the answer is yes, he should get his fair share back, regardless of if he has a municipal pension or not.
I understand the math of your argument, but I think you're missing the way the benefit formula was constructed in terms of having a social goal, which is to supplement people with low lifetime earnings.
Let's assume that you worked 30 years in the public sector (at $50k per year) with 10 years under Social Security.
Let's also assume that John and Jenny's work was entirely in the private sector.
How do you differ from John and Jenny? They're poor and you're not. Your lifetime earnings would be, say, 40 years x $50k = $2 million, while John and Jenny's lifetime earnings are $500k.
It's not surprising that Social Security would treat you differently, since Social Security's express purpose is to provide a higher return per dollar of payroll tax contributions for people with low lifetime earnings than high lifetime earnings. The whole benefit formula is built around that -- it's not just an arbitrary set of numbers, but it's precisely the PURPOSE of Social Security.
But Social Security's benefit formula is built around the assumption that all lifetime earnings are in Social Security-covered employment. The small number of people who have earnings from non-covered jobs aren't accounted for by the formula, which is why the WEP/GPO provisions exist.
This issue with state/local governemnt employees has been recognized for decades, and pretty much the only people who object are the state/local governemnt employees, many of whom don't really understand why the rules exist in the first place.
-- Just to add an analogy that maybe I've used elsewhere: Medicaid is a means-tested program that provides health coverage to the poor, which "poor" mostly defined in terms of income. Now, imagine that somehow your job managed to provide you with some form of compensation that wasn't counted as income -- maybe chits at a company store or whatever. Because those chits aren't counted as income, you would look poor and might qualify for Medicaid even though in reality you're not poor. That's more or less what's happening with state/local employees with Social Security if there's no WEP/GPO: Social Security promises a higher rate of return on taxes to people with low lfietime earnings than high lifetime earnings. State/local governent employees LOOK like theyv'e got low lfietime earnings, even though they don't.
I’ve seen WEP misunderstood and miscalculated by Social Security employees. So while I agree with the principle this, at least this battle will no longer have to be fought.
Do you have any idea as to *why* the Average Wage Index is used to adjust historical earnings for each worker when calculating AIME? It seems to overstate the adjusted historical wage. Why not use the Median Wage Index?
Or has there ever been a discussion of calculating an "AIME" but only for years where paid into Social Security and then multiplying by a "years of service" as part of the PIA calculation?
So instead of dividing by 420 months [35 years * 12 months], the AIME would *ONLY* be divided by the number of years or months of "covered" earnings? and then multiply that by some amount such as (years of covered earnings / 35 years). In some sense this would be more like a traditional pension calculation (i.e. 1% of average final salary * years of service).
Actually, I don't think that either should be used. Instead, past earnings should be adjusted for inflation, since that provides a more accurate picture of the purchasing power that people had during their working years. Indexing past earnings for the growth of national average wages credits people with more past earnings than they actually had.
Where this comes into play is in calculating Social Security's replacement rates. Typically, it's said that Social Security replaces about 40% of your pre-retirement earnings. Since financial planners say that you'd want a total replacement rate of around 70% of your pre-retirement pay, a person seemingly has to make up the other 30% on their own.
However, the stated 40% replacement rate is actually your benefit as a percentage of your WAGE-INDEXED pre-retirement earnings, which are around 20% higher than the actual purchasing power of your wages. So, in reality, Social Security replaces more of a typical retiree's pre-retirement standard of living than you might think.
If interested...
https://www.aei.org/research-products/working-paper/replacement-rates-and-the-retirement-crisis/
Hi Andrew! Thank you for explaining clearly what even most SSA employees sadly do not understand about WEP and GPO. Since my mother and all of her teacher friends are directly affected and will never understand or accept what you have outlined in terms of facts, I think there’s something else going on here.
The Social security statement has a bit of stock language about these provisions as you know, which no one pays attention to. Meanwhile, public sector employees are being misled by the very data in the statements they receive from the agency. SSA should work with IRS to create a more meaningful statement for affected individuals, or maybe not send any statement at all. It would be better not to provide any estimate than to provide an inflated one. One that incorrect estimate gets into the hands of a real person, one that incorrectly assumes no non-pensión at play, they will forever see any divergence from that as a deep “cut” in their benefit. It’s also very startling and unfair to send out these statements and then blindside someone when they finally apply for benefits. Who wouldn’t be angry if you were told x for decades and now you’re being told y?
So we are basically creating and perpetuating the confusion that is leading to this misguided legislation. The policy is challenging to understand for even agency employees who administer the program (see FB thread “For Active and Retired SSA employees”). so should we really expect the public to understand after we mail them a misleading statement year after year?
My point is that if this is important enough for legislators to push along this far, and hopefully no farther, it should be important enough to fix one of the root causes of the confusion, and modify the statement at the very least.
Could not disagree more with Andrew here:
"As a result, public employees would receive a better return on their Social Security contributions than people with similar lifetime earnings who paid into Social Security throughout their lives. That’s unfair – duh – and the WEP and GPO rules exist to prevent this unfairness from happening. "
If I pay into Social Security for 10 years and my average yearly indexed earnings is $50k a year, my AIME is $1190. Right at the top of the first bend point of .90, thus my PIA is roughly $1070
If John pays into Social Security for 20 years with an average yearly indexed earnings of $25k a year his AIME is $1190 and his PIA is also $1070.
If Jenny pays into Social Security for 35 years with an average yearly indexed earnings of $14,285 her AIME is also $1190 and her PIA is....you'll never guess, $1070 too.
How is the worker who also has a pension getting any benefit above and beyond what his contribution into Social Security was relative to anyone else? He's literally getting the exact same amount.
Are we going to make the same "unfair" argument in that Jenny is receiving a Social Security benefit equal to John and me even though she paid into the system for 35 years whereas John and I only paid in for 10 and 20 years respectively?
I doubt it.
Did the person pay his fair share into the system or not? If the answer is yes, he should get his fair share back, regardless of if he has a municipal pension or not.
I understand the math of your argument, but I think you're missing the way the benefit formula was constructed in terms of having a social goal, which is to supplement people with low lifetime earnings.
Let's assume that you worked 30 years in the public sector (at $50k per year) with 10 years under Social Security.
Let's also assume that John and Jenny's work was entirely in the private sector.
How do you differ from John and Jenny? They're poor and you're not. Your lifetime earnings would be, say, 40 years x $50k = $2 million, while John and Jenny's lifetime earnings are $500k.
It's not surprising that Social Security would treat you differently, since Social Security's express purpose is to provide a higher return per dollar of payroll tax contributions for people with low lifetime earnings than high lifetime earnings. The whole benefit formula is built around that -- it's not just an arbitrary set of numbers, but it's precisely the PURPOSE of Social Security.
But Social Security's benefit formula is built around the assumption that all lifetime earnings are in Social Security-covered employment. The small number of people who have earnings from non-covered jobs aren't accounted for by the formula, which is why the WEP/GPO provisions exist.
This issue with state/local governemnt employees has been recognized for decades, and pretty much the only people who object are the state/local governemnt employees, many of whom don't really understand why the rules exist in the first place.
-- Just to add an analogy that maybe I've used elsewhere: Medicaid is a means-tested program that provides health coverage to the poor, which "poor" mostly defined in terms of income. Now, imagine that somehow your job managed to provide you with some form of compensation that wasn't counted as income -- maybe chits at a company store or whatever. Because those chits aren't counted as income, you would look poor and might qualify for Medicaid even though in reality you're not poor. That's more or less what's happening with state/local employees with Social Security if there's no WEP/GPO: Social Security promises a higher rate of return on taxes to people with low lfietime earnings than high lifetime earnings. State/local governent employees LOOK like theyv'e got low lfietime earnings, even though they don't.