Big news for Colorado PERA employees
HR 82, also known as the Social Security Fairness Act, is legislation aimed at repealing the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) entirely. After years of advocacy and bipartisan support, HR 82 passed in the U.S. House of Representatives in late 2023. Here’s how the legislation developed and what it means:
- Background and Advocacy:
- Public sector workers and retirees have long argued that WEP and GPO unfairly penalize them, reducing benefits they paid into through Social Security.
- Advocacy groups highlighted how these provisions disproportionately affect women, part-time workers, and individuals with mixed employment histories.
- Key Provisions of HR 82:
- Repeals the Windfall Elimination Provision and Government Pension Offset.
- Restores full Social Security benefits for retirees affected by these provisions, including retroactive adjustments. (appears back to Jan 1, 2024)
- Legislative Process:
- HR 82 gained significant bipartisan support, with recognition that the provisions create inequities.
- Passed the House and Senate with overwhelming support and is expected to be signed by President Biden.
Impacts of HR 82 on Colorado PERA Retirees
Colorado’s PERA is a public retirement system that does not contribute to Social Security. As a result, many PERA retirees have been subject to WEP and GPO reductions. The repeal of these provisions will have several effects:
- Restoration of Benefits:
- PERA retirees who worked in Social Security-covered jobs will see their benefits increase as the WEP reduction is eliminated.
- Spouses and survivors will regain full spousal or survivor benefits without the GPO offset.
- Increased Retirement Security:
- The repeal will improve financial security for retirees, especially for households relying on spousal or survivor benefits.
- Many retirees will see significant increases in their monthly income, enhancing their ability to meet rising costs of living.
- Tax Implications:
- Additional Social Security benefits may increase taxable income for some retirees, necessitating updates to tax planning strategies.
- Estate Planning Considerations:
- With higher Social Security benefits restored, retirees may need to revisit their estate plans, ensuring coordination with PERA pensions and other assets.
What Clients Need to Know
- For Those Affected by WEP:
- Understand your current Social Security benefit reduction.
- If HR 82 is signed into law, calculate how the repeal will affect your monthly benefits.
- For Those Affected by GPO:
- Estimate potential spousal or survivor benefits if the GPO is repealed.
- Consider how restored benefits could impact your household budget and retirement plans.
- Action Steps:
- Monitor legislative updates on HR 82’s as the President is due to sign and next steps.
- Schedule a review with a financial advisor to evaluate the impact on retirement income and tax planning.
Understanding the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)
The Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) are federal rules that can significantly reduce Social Security benefits for individuals who also receive pensions from non-Social Security-covered employment. These provisions have long been sources of confusion and frustration for affected individuals, particularly in states like Colorado, where many workers participate in the Public Employees’ Retirement Association (PERA).
What Is the Windfall Elimination Provision (WEP)?
The WEP reduces Social Security benefits for individuals who:
- Earned a pension from work not covered by Social Security (e.g., state or local government jobs under systems like PERA).
- Also worked in jobs covered by Social Security, earning enough credits to qualify for benefits.
How WEP Works:
- Social Security uses a progressive formula to calculate benefits, designed to replace a higher percentage of income for lower earners.
- WEP modifies the first calculation step, lowering the percentage used (from 90% to as low as 40%, depending on years of Social Security-covered work).
- The maximum WEP reduction in 2024 is $557 per month.
Impact:
- This disproportionately affects individuals with a mix of non-covered government work and Social Security-covered employment, such as teachers or police officers transitioning between the private and public sectors.
What Is the Government Pension Offset (GPO)?
The GPO reduces Social Security spousal or survivor benefits for individuals who receive pensions from non-Social Security-covered work. The reduction equals two-thirds of the pension amount from the non-covered job.
Example:
- A PERA retiree receives a $3,000 monthly pension.
- Two-thirds of $3,000 is $2,000.
- If the retiree qualifies for $2,500 in Social Security spousal benefits, the GPO reduces it by $2,000, leaving only $500.
Impact:
- The GPO often results in a complete elimination of spousal or survivor benefits, significantly impacting household financial planning for retirees.
Conclusion
The passage of HR 82 represents a significant victory for public sector retirees across the country, particularly in states like Colorado with large non-Social Security-covered workforces. The repeal of WEP and GPO will restore fairness to Social Security benefits, providing long-awaited relief for affected individuals. As retirees prepare for these changes, financial advisors play a crucial role in helping clients adjust their retirement and tax strategies to maximize the benefits of this landmark legislation. Call your Capstone advisor to review this great news!