Non-Covered Pension Social Security Penalty

Many people who work for an employer who doesn’t contribute to social security may not be aware of the WEP penalty when taking one’s own social security, and when switching over to a spousal benefit later (when it makes sense), the WEP penalty stops, but the GPO penalty starts when switching over to the spousal benefit! So, either way there may be a reduction in benefits for the individual who has the non-covered pension employer. On the WEP, it depends on how many qualifying substantial income years ( a term that social security uses) worked for employers who contributed to social security.

If you have 20-30 years of substantial earnings with past employers who contributed to social security, each year between 20 and 30 years of substantial earnings has a different percentage applied as to how much of your benefit you will receive. The more years worked with substantial earnings, the higher your monthly benefit will be. If you have 20 or less years of substantial benefits, your will experience a flat percentage which will be a lower monthly social security benefit than what it would have been if you worked with 30 years reflecting substantial earnings. The difference between 20 years of substantial earnings and 30 years of substantial earnings equates to receiving up to 50% more in monthly benefits and earning up to 90% of what your monthly benefit would be even if you currently work for a non-covered employer.

The WEP penalty can never be higher than 50% of your non-covered pension amount. For example, if your anticipated monthly non-covered pension amount is to be $1000, and your social security statement shows an anticipated social security benefit of $850 at age 62, the most that can be subtracted from your social security benefit would be $500 regardless of the WEP penalty calculation leaving the social security benefit to be $350 at that age (in this case age 62). Again please keep in mind this applies to your own social security benefit, not the spousal or survivor benefit and the year you choose to start taking social security. Not only do you get less in monthly benefits by taking social security early by taking at age 62, you also experience the WEP penalty in addition to that. This doesn’t seem to be fair to parents who chose to stay home and raise a family and return to work later and work for an employer who has a non-covered pension. Those years at home raising a family could have been years spent working making an income and adding to the substantial earnings years. A penalty for staying home and helping raise a family? Not fair.

The GPO penalty comes into play with a spouse who has a WEP penalty, switches over to the spousal social security benefit. The GPO takes a flat 66% of your non-covered pension amount and subtracts that dollar amount from your spousal benefit. Using the same example above, someone getting a non-covered pension of $1000 per month has 66% of that pension, $666, subtracted from their projected spousal benefit. Also note that your spousal benefit will not be a flat 50% of your spouse’s benefit as many people think. You are entitled to 50% of your spouse’s benefit only when they start taking social security and….if you have waited until your full retirement age to take the spousal benefit. If you take earlier than your full retirement age, you get less. The percentage of your spouse’s benefit has different percentages between ages 62 to your full retirement age, and it doesn’t grow after your full retirement age year. There is no benefit for waiting until you turn age 70 to switch over from your own benefit (assuming you have already started taking social security) it maxes out at your full retirement age.

There’s a lot to digest when it comes to the WEP and GPO but just know your social security statement is not correct if you are entitled non-government pension.

It is critical that you let the social security administration know that you have a non-covered pension. Otherwise down the line, you will get hit with a nasty repayment demand for the amount of benefits you have to payback…..with additional penalties on top of that. You would think they should know you have a non-covered pension, but many times they do not and that’s where people get into trouble, they think the social security statement benefit calculations are correct and they are not.

Here is a WEP handout and a separate GPO handout that cover a non-covered pension and how it affects your social security benefit, from the social security website that may shed some light on each individual penalty. If it gets too confusing or frustrating, you’re not alone. Feel free to contact me with any questions or concerns or fill out the below customer contact form with your scenario and I will steer you in the right direction. I have access to data and reports that can help you.

Kind regards,

Kevin Walton

Kind regards,

Kevin Walton