The Social Security Fairness Act: Is it Really Fair?

Episode 314 – The President is about to sign the Social Security Fairness Act into law. But is it really fair? And how does it affect Social Security’s solvency?

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Transcript of Podcast Episode 314

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, the Social Security Fairness Act has been signed into law.

On December 21, the Senate passed the Social Security Fairness Act, which will result in increased benefits for millions of public sector employees. President Biden signed the bill into law on January 6.[1]

The new law would repeal two long-held provisions—the Windfall Elimination Provision and Government Pension Offset—that limit benefits for people who are also receiving benefits from state and local pensions that were exempt from paying Social Security withholding taxes.

The first provision, Windfall Elimination, also known as WEP, is one of the most complicated parts of Social Security. Some state and local governments provide employer-sponsored retirement programs for their employees where neither the employer nor employee pays Social Security withholding. These exempt retirement programs are considered to be in lieu of Social Security. For example, teachers in the state of Connecticut have their own retirement pension and do not have Social Security withheld from their paychecks.

In order to qualify for your personal Social Security benefit, you need to work a minimum of 10 years. WEP affects workers who spend part of their careers working in the public sector—not covered by Social Security—while still working at least 10 years in another job that is covered by Social Security, such as a private sector job.

The way the Social Security benefit is calculated, people with shorter careers or lower incomes generally get a better deal than others. That is, these people get more money back per dollar of withholding tax than people with longer careers or higher incomes. Many public sector workers end up with a significant pension from their non-Social Security taxable jobs. WEP tries to make the Social Security benefit calculation fairer to everyone else.

WEP uses a complicated formula to reduce the worker’s Social Security benefit in the belief that the other (non-Social Security) retirement benefit will offset the full Social Security benefit. In essence, it tries to eliminate the so-called “windfall” that may occur when someone gets both Social Security and an exempt pension.

The second provision, Government Pension Offset, also known as GPO, is a bit easier to understand. GPO is applicable only to Social Security spousal and survivor benefits. It reduces these benefits payable to a worker who also receives a non-covered pension, that is, from a job where no Social Security taxes were withheld. The GPO benefit reduction is equal to two thirds of the pension from non-covered Social Security employment. If the pension is big enough, it could completely eliminate the Social Security spousal and survivor benefit.

Here’s a quick example of why GPO exists. Assume I have a personal Social Security benefit of $2,000. Also assume that my spouse did not work outside of the home for more than 10 years. Under those circumstances, she would not be eligible for a personal Social Security benefit, but she would be eligible for a spousal benefit. Once I apply for my benefit, she could collect up to 50 percent of that benefit, or $1,000 per month.

But what if she worked outside the home as a state employee who never had to pay for Social Security? Her state pension might even be bigger than my Social Security benefit. Under those circumstances, should she still be entitled to a Social Security spousal benefit? This is what GPO tries to address.

The repeal of these two provisions means that, according to the Congressional Budget Office, approximately 2.5 million retirees will see their benefits increase.[2]

The government says it took this action in the interest of fairness. Senate Majority Leader Chuck Schumer tweeted that “This would ensure Americans are not erroneously denied their well-earned Social Security benefits simply because they chose careers in public service.”[3]

But it costs money. Perhaps the biggest concern people have with Social Security is its long-term viability. Based on the Trustees report published in May 2024, without any further action, the Social Security Trust Fund is projected to run out of money in 2033. The result of this would be a 21 percent reduction in all benefits for everyone.[4]

The Social Security Fairness Act could make the situation worse. It increases the amount paid out of the Trust Fund by an estimated $190 billion over 10 years, without any corresponding increase in the amount paid in.[5] It is estimated that the Act will shorten the life expectancy of the Trust fund by another 6 months.[6]

The last major reform of the Social Security system occurred in 1983. At the time, it was estimated that the Trust Fund would be solvent for the next 75 years.[7] The Social Security Fairness Act may put additional strain on the system which was not anticipated.

[1] Gibson, Kate. “Senate approves bill to expand Social Security to millions of Americans.” cbsnews.com. https://www.cbsnews.com/news/social-security-fairness-act-senate-vote-passed/ (accessed Dec. 23, 2024)

[2] Haug, Norm. “H.R. 82 Passes Senate: A Historic Step in Social Security Reform.” rssa.com. https://rssa.com/resources/h-r-82-passes-senate-a-historic-step-in-social-security-reform/ (accessed Dec. 23, 2024)

[3] Gibson, Kate. “Social Security Fairness Act to get a vote in the Senate, Chuck Schumer says.” cbsnews.com. https://www.cbsnews.com/news/social-security-fairness-act-chuck-schumer-senate-vote/ (accessed Dec. 23, 2024)

[4] Gibson, Kate. “Social Security Fairness Act to get a vote in the Senate, Chuck Schumer says.” cbsnews.com. https://www.cbsnews.com/news/social-security-fairness-act-chuck-schumer-senate-vote/ (accessed Dec. 23, 2024)

[5] WSJ Editorial Board. “Whistling Past Social Security’s Insolvency.” wsj.com. https://www.wsj.com/opinion/whistling-past-social-securitys-insolvency-public-union-senate-a4267c71 (accessed Dec. 23, 2024)

[6] Adragna, Anthony. “Social Security measure passes Senate, sending it to Biden.” poltico.com. https://www.politico.com/live-updates/2024/12/20/congress/social-security-bill-passes-senate-00195786 (accessed Dec. 23, 2024)

[7] Steiner, Ken. “Social Security’s Deterioration and Implications for Future Reform.” advisorperspectives.com. https://www.advisorperspectives.com/articles/2024/02/26/social-securitys-deterioration-implications-future-reform (accessed Dec. 26, 2024)

 

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