Windfall elimination provision - What happens if you take another pension early, SS late?

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EnjoyTheJourney
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Windfall elimination provision - What happens if you take another pension early, SS late?

Post by EnjoyTheJourney »

My spouse and I have the option to take a pension from another national government starting when we're each 60 years old, and then beginning to claim SS when I turn 70 years old.

Given that the windfall elimination provision (WEP) seems to apply to our case, I'm wondering how the different phasing in taking different pensions might be handled.

One possibility is that pension money received before claiming social security for which WEP applies is partially "clawed back" by reductions to social security checks after starting social security at age 70, with or without adjustments for inflation that potentially inflate the sum deducted. Another possibility is that there are no clawbacks, but that WEP is applied to all pension money received from another national government after we file to receive social security. Another possibility, I suppose, is for the SSA to assert a claim to the pension money we receive from another nation as we receive it^ (ie: you pay us before we pay you).

I've read multiple sources of information about the windfall elimination provision, but so far I've found nothing definitive about what happens in this scenario.

Thank you in advance for answers / resources provided!

^ This last possibility seems unlikely, but it's probably worth seeing if it can be ruled out rather than making potentially unwarranted assumptions.
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Flobes
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by Flobes »

EnjoyTheJourney wrote: Wed May 27, 2020 7:50 am One possibility is that pension money received before claiming social security for which WEP applies is partially "clawed back" by reductions to social security checks after starting social security at age 70, with or without adjustments for inflation that potentially inflate the sum deducted. Another possibility is that there are no clawbacks, but that WEP is applied to all pension money received from another national government after we file to receive social security. Another possibility, I suppose, is for the SSA to assert a claim to the pension money we receive from another nation as we receive it^ (ie: you pay us before we pay you).
WEP mandates how your Social Security benefit amount is calculated.

WEP is not about accounting for other income. WEP does not take or "claw back" other pensions.

WEP impact is entirely about calculus of the Social Security first bend point, which is typically 90%. The WEP changes the first bend point to 40%.

But first bend point is increased 5% for each "substantial" year >20 years (so 21 years is 45%, 29 years is 85%, etc) from 20-30 substantial years. For WEP vs PIA computation, the first bend point remains 90% if you have 30+ substantial years, regardless of the pension. Note the word ^ substantial; this is a specified and defined amount, published each year.

Impacts of the WEP are subject to limits. Reduction to SS cannot be more than 50% of the pension. There is also a maximum dollar amount determined at age 62, when PIA is determined. SS after WEP may increase with delayed credits, COLAs, etc.

Under current law there are two ways to mitigate the WEP from calculation of Social Security benefits.
• The first: having 30 substantial years eliminates the WEP. Having 20-30 substantial years reduces its impact.
• The second: if you take a lump sum distribution out of your pension before you are eligible to collect those retirement benefits, then the WEP is not applied. Note: Once you're deemed eligible for the pension, taking a lump sum does not remove the WEP.

Here's the relevant document from Social Security POMS that includes all the very particular WEP definitions of what is a Pension, what is a Withdrawal, what is Eligibility:
Determining Pension Applicability, Eligibility Date, and Monthly Amount
If you match all the ^ specifics, then if you withdraw funds before eligibility, then you are not subject to the WEP.

On a practical side, WEP impact can be mitigated by taking Social Security early while starting pension late. WEP is not applied until the pension actually starts paying, so one can get unWEPed SS from 62 to 70, and then start start the pension at 70 with the SS "ding" moving forward. It may be advantageous to do the calculus of delaying the pension to maximize unWEPed Social Security for a few years. Especially if your pension benefits continue to grow while delayed. It's a personal see-saw evaluation: size and growth of SS vs size and growth of pension.

Please note that if you are subject to WEP for your own SS benefits, you may likely be subject to GPO (Government Pension Offset) re SS spousal benefits. GPO calculus is based on size of pensions.

Jim Blakenship authored an informative and comprehensive series about the WEP and GPO:
http://financialducksinarow.com/?s=WEP
carolinaman
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by carolinaman »

+1. WEP does not apply to me but this was a fantastic response by Flobes.
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EnjoyTheJourney
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by EnjoyTheJourney »

Flobes:

Thank you for the detailed response and for the suggested resource; I've bookmarked that website and I'm actively exploring the information provided when times allows.

It seems there is an indirect response to the questions posed in the OP. But, it still might be helpful to explain our situation a bit further.

Social security will probably make up about 85-90% of the pension money that we receive. The extra 10-15% from other sources is (of course) still worth receiving. But, maximizing social security is the most important goal. Also leaving survivor benefits in the best possible place is another important goal because my wife (who will never receive social security based on her own earnings) will be helped by that should I pass before her. So, unless and until social security laws change in ways to make that not a good idea, claiming social security when I reach 70 will be the best way forward.

What I'm pondering, and what seems to have been indirectly answered, is when to start receiving pension income from sources other than social security. The tentative plan I had in mind, which has been reinforced thus far, is to start at age 60.

As with social security claiming early from the other pension sources will lead to a lower monthly payout. By shifting 10 years of payments to the period of time before social security is claimed, and lowering the amount received during the period social security checks are being received, the overall reductions to social security checks from the windfall elimination provision will likely be reduced.

My main question had to do with whether the SSA looks at payments received before claiming social security when calculating the WEP reduction. The answer to that questions seems to be "No", which makes claiming other pension sources early more appealing.

If the foregoing two paragraphs are factually incorrect, then hopefully somebody will point that out.
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Flobes
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by Flobes »

EnjoyTheJourney wrote: Wed May 27, 2020 7:50 am My spouse and I have the option to take a pension from another national government starting when we're each 60 years old, and then beginning to claim SS when I turn 70 years old.
EnjoyTheJourney wrote: Thu May 28, 2020 6:26 am Also leaving survivor benefits in the best possible place is another important goal because my wife (who will never receive social security based on her own earnings) will be helped by that should I pass before her.
If your wife has her own government pension, as you seem to have indicated, then her collecting Social Security based on your benefits will probably be be impacted by the GPO. This affects spousal (while you're are alive) and survivor (after you pass) benefits.

The calculus is a reduction equal to two-thirds of the amount of her pension will be deducted from her spousal or widows benefits.

From SSA: Government Pension Offset

EnjoyTheJourney wrote: Thu May 28, 2020 6:26 am By shifting 10 years of payments to the period of time before social security is claimed, and lowering the amount received during the period social security checks are being received, the overall reductions to social security checks from the windfall elimination provision will likely be reduced.
No. Again, the WEP is based on your Social Security earnings. It will be applied when SSA determines the amount of your SS benefits, because you are receiving other government pensions where you did not pay into Social Security. WEP has nothing to do with how long you've been receiving those other pensions. It is not influenced by the amount of your other pensions, except that WEP is limited to no more than half the amount of the other pensions.

EnjoyTheJourney wrote: Thu May 28, 2020 6:26 am Social security will probably make up about 85-90% of the pension money that we receive.
Important question for you: How many "substantial" years of SS earnings will you have? 30+? More than 20? Less than 20?

Chart of yearly "substantial earnings" amounts is at bottom of page two: WEP Fact Sheet.

Social Security Administration offers tools that may help you visualize your situation. You might want to try the simpler SS Online Calculator (WEP Version) before the more complicated Social Security Detailed Calculator.
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EnjoyTheJourney
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by EnjoyTheJourney »

Flobes: I appreciate the time you're putting into explaining WEP and providing resources. I realize now that I made an error in crafting the OP, providing more information than needed and more or less inviting a broad response that addressed many issues. I apologize for making things more complicated and time consuming than they needed to be.

I should probably have stated the OP question in the simplest possible terms, so I'll try now. If I start receiving a pension from non-US-government sources^ when I'm 60, to which WEP will apply, and I claim SS when I turn 70, which of the following will occur ...

1. I'll need to send to the SSA half of the pension money received from non-US-government sources until I turn 70 and claim SS, at which point the SSA will start deducting half of my non-US-government pension from SS payments.

2. The SSA will not claw back any pension money I receive from a non-US-government source while I'm in my 60s. Instead, after I start claiming SS upon turning 70 the SSA will reduce the amount of my checks to essentially levy the WEP against pension income earned in my 60s.

3. Neither of the above will happen. That would mean I would get pension checks from non-US-government sources throughout my 60s, have lower pension payments from those sources in my 70s and beyond, and have less WEP deducted overall.

Phoning the SSA is a bit of a roll of the dice because sometimes the phone reps make mistakes; errors probably arise for unusual questions such as this more often than for the more common kinds of questions that get asked. Hopefully somebody here knows which of these scenarios would play out and/or resources that clearly address this situation can be pointed out.


^ I would (probably) no longer be a US resident at that point and I'd be living in the country in which the pension would be received, in case that matters in some way. WEP will apply as I'm highly likely to have more than 20 and less than 30 years of work that count toward social security; the amounts involved are such that 50% of the pension to which WEP applies will be taken by the SSA.

There are some broader issues to explore, at some point. But, for now this is a fundamental kind of issue to sort out, especially if the SSA expects 50% of my pension check through my 60s to be sent to them; the math of that matters for budgeting purposes.
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Flobes
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by Flobes »

Let's try a third time.
EnjoyTheJourney wrote: Fri May 29, 2020 6:36 am If I start receiving a pension from non-US-government sources^ when I'm 60, to which WEP will apply
WEP does not apply to your pension.

WEP is a formula that applies to your Social Security benefits because you are eligible for the pension.

WEP is an alternative formula used to calculate your Social Security benefits. WEP is applied when you are receiving another pension where you did not pay into Social Security. WEP does not impact that pension. WEP does not take any money from that pension. It does not matter how large the pension is or how long you've been eligible for that pension. Once you are eligible for that other pension, WEP is engaged to determine your Social Security benefits.

EnjoyTheJourney wrote: Fri May 29, 2020 6:36 am I'll need to send to the SSA half of the pension money received from non-US-government sources
No.
EnjoyTheJourney wrote: Fri May 29, 2020 6:36 am after I start claiming SS upon turning 70 the SSA will reduce the amount of my checks to essentially levy the WEP against pension income earned in my 60s.
No.
EnjoyTheJourney wrote: Fri May 29, 2020 6:36 am have less WEP deducted overall
No.
EnjoyTheJourney wrote: Fri May 29, 2020 6:36 am SSA expects 50% of my pension check through my 60s to be sent to them
No.
EnjoyTheJourney wrote: Fri May 29, 2020 6:36 am the amounts involved are such that 50% of the pension to which WEP applies will be taken by the SSA
No.

EnjoyTheJourney wrote: Fri May 29, 2020 6:36 am WEP will apply as I'm highly likely to have more than 20 and less than 30 years of work that count toward social security
What's really important in WEP calculus is how many "substantial" years of Social Security earnings you have. Not all years of work meet the "substantial" threshold, even when those years count toward Social Security. "Substantial" is a special definition, applicable only for WEP determinations. More "substantial" years equates to less WEP reduction to your Social Security benefits.
EnjoyTheJourney wrote: Fri May 29, 2020 6:36 am I would (probably) no longer be a US resident at that point and I'd be living in the country in which the pension would be received, in case that matters in some way.
There are special rules about receiving Social Security benefits when you live outside the US.


Perhaps you are trapped in a misunderstanding of "WEP is limited to half the amount of the pension."

This does not mean that half your pension is vulnerable or payable to Social Security.

It means that the WEP reduction to your Social Security benefits cannot exceed half the amount of the pension.

Here's an overly simplistic example:
• You're about to turn 62; SSA determines your PIA (Primary Insurance Amount).
• Based on your SS earnings history, your Social Security benefits will be $3000/month at age 70.
• Your have another "unqualified" pension, meaning you did not pay into Social Security to earn this pension.
• This subjects you the the WEP, an alternative calculation of your SS benefits. WEP reduces your PIA.
• Your WEP (by recalculation of the first bend point) would be $600/month reduction to your SS benefits.
• But the impact of the WEP is limited, and whichever nets you the highest benefits is used by SSA.
• For everyone, WEP is limited by amount determined when they turn 62. In 2020, limit is $480. So WEP cannot be more than $480.
WEP is also limited to half the amount of your pension.
• Your other pension is $600/month, so your WEP is limited to $300/month reduction to your Social Security PIA.

Note: Taxation of your foreign pension is a whole different matter. It depends on many factors. That's between you and the IRS (and not the SSA, Social Security Administration).

Summary; read this over and over it until sinks in:
• WEP determines my Social Security benefits.
• WEP does not impact my foreign pension, in any way.
Last edited by Flobes on Fri May 29, 2020 1:11 pm, edited 2 times in total.
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rterickson
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by rterickson »

Excellent posts from Flobes.

My question is how does the social security administration "find out" about the foreign (non-SS) pension in the first place? I would imagine that this is covered by tax treaty for the governments that have one with the US. In other cases, is the social security applicant required to disclose eligibility for a foreign pension to the SSA?
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by jj »

rterickson wrote: Fri May 29, 2020 10:11 am Excellent posts from Flobes.

My question is how does the social security administration "find out" about the foreign (non-SS) pension in the first place? I would imagine that this is covered by tax treaty for the governments that have one with the US. In other cases, is the social security applicant required to disclose eligibility for a foreign pension to the SSA?
I agree - excellent posts from Flobes - thank you.

You have to disclose eligibility for (future) foreign pensions during the SS application process. If you are eligible for pensions they note that and SSA sends a questionnaire periodically to ask about them. Meanwhile, you are obligated to inform SSA if you start receiving foreign pensions as at that point your SS payment will be recalculated.

The taxability of those foreign pensions is worked out within the IRS system. Some countries have dual taxation agreements to cover it which determines where the pension is taxed. Tax is paid either in the foreign country and a foreign tax paid credit is claimed in the US, or the foreign country does not tax the income and it is taxed fully in the USA.
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by pshonore »

jj wrote: Fri May 29, 2020 10:37 am
rterickson wrote: Fri May 29, 2020 10:11 am Excellent posts from Flobes.

My question is how does the social security administration "find out" about the foreign (non-SS) pension in the first place? I would imagine that this is covered by tax treaty for the governments that have one with the US. In other cases, is the social security applicant required to disclose eligibility for a foreign pension to the SSA?
I agree - excellent posts from Flobes - thank you.

You have to disclose eligibility for (future) foreign pensions during the SS application process. If you are eligible for pensions they note that and SSA sends a questionnaire periodically to ask about them. Meanwhile, you are obligated to inform SSA if you start receiving foreign pensions as at that point your SS payment will be recalculated.

The taxability of those foreign pensions is worked out within the IRS system. Some countries have dual taxation agreements to cover it which determines where the pension is taxed. Tax is paid either in the foreign country and a foreign tax paid credit is claimed in the US, or the foreign country does not tax the income and it is taxed fully in the USA.
As far as disclosure, I think the same is true for domestic pensions from a job where you did not pay into SS. Primarily some govt employees and a lot of school teachers. Both WEP and GPO adjustments are likely.
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by rterickson »

jj wrote: Fri May 29, 2020 10:37 am
rterickson wrote: Fri May 29, 2020 10:11 am Excellent posts from Flobes.

My question is how does the social security administration "find out" about the foreign (non-SS) pension in the first place? I would imagine that this is covered by tax treaty for the governments that have one with the US. In other cases, is the social security applicant required to disclose eligibility for a foreign pension to the SSA?
I agree - excellent posts from Flobes - thank you.

You have to disclose eligibility for (future) foreign pensions during the SS application process. If you are eligible for pensions they note that and SSA sends a questionnaire periodically to ask about them. Meanwhile, you are obligated to inform SSA if you start receiving foreign pensions as at that point your SS payment will be recalculated.

The taxability of those foreign pensions is worked out within the IRS system. Some countries have dual taxation agreements to cover it which determines where the pension is taxed. Tax is paid either in the foreign country and a foreign tax paid credit is claimed in the US, or the foreign country does not tax the income and it is taxed fully in the USA.
Very clear, thank you jj!
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EnjoyTheJourney
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Re: Windfall elimination provision - What happens if you take another pension early, SS late?

Post by EnjoyTheJourney »

As a postscript, from Flobes' responses it seems clear that pension money received as monthly payments before applying for SS will not be subject to WEP. Understanding the answer to that question was the key objective in starting this thread and it has been achieved.

The desire to have a higher spousal SS survivor benefit had already anchored in place the choice to take SS at the latest possible date. And, given the drop in WEP payable over time from taking non-US pensions early the math decisively favors taking the non-US pensions early*.

There is an oddity in the way this is handled in that lumpsum pension payouts are subject to WEP if they would have been subject to WEP when received as monthly income, with a few exceptions, while monthly payments of a pension before receiving SS are not subject to WEP even if they would be subject to WEP when received while receiving SS in the same time frame. But, the law is what it is.

* It's not always the case that "take SS late, take pensions subject to WEP early" is the right course of action. In our situation, though, the math is crystal clear.
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