The majority of police officers and firefighters, as employees of local or state governments, are covered by pension plans. Because federal law allows state and local governments to exclude certain employees covered by pensions from Social Security, these pensions are, for the most part, not considered to be covered by Social Security. While these pension plans must meet certain standards for the retirement and disability benefits they provide, and while the provisions of police and firefighter pensions are, in many cases, more generous than the benefits provided by Social Security, they can also present covered employees with some complications as they plan for retirement.
Windfall Elimination Provision (WEP)
The chief of these complications arises from a provision in the Social Security code known as the windfall elimination provision (WEP). This provision functions to reduce the amount of Social Security benefits available to certain persons who are covered by pensions from state or local government sources. (There are exceptions in the case of police or firefighters whose pensions are covered under what is called a 218 agreement.) The principal effects are felt by police officer or firefighters who are covered by a pension plan but who also had or have employment that was subject to withholding of Social Security taxes.
The problem arises when such individuals start looking toward retirement and calculating the monthly income they’ll have from various sources. Anyone can obtain an estimate of their projected Social Security benefits by using the calculators at MySocialSecurity.gov. But if you are subject to the WEP, those projections will be wrong; you could be assuming that your monthly income from Social Security will be several hundred dollars more than it actually will be—not an error you want to find out right before retirement.
The problem is that typically, no one is going to tell you ahead of time that you are or aren’t affected by the WEP. One way you can start to figure it out is by learning how the WEP is applied. If you have earnings covered by a pension (state or local government employment) and also earnings covered by Social Security (working for a business or other entity that pays Social Security taxes), the WEP may affect you. But if you have worked for 21 years (receiving what Social Security calls “significant earnings”) for one or more employers who paid Social Security taxes, the calculation for the WEP begins to reduce. If you have 30 or more years of “significant earnings” covered by Social Security the WEP no longer applies to you.
For 2020, the minimum annual amount defined as “significant earnings” is $25,575. The Social Security Administration provides an online planner that will allow you to calculate the effect of the WEP on your retirement benefits. To use the planner, you need to create a free account at MySocialSecurity.gov, so that you will be able to view your Social Security earnings record. You can also learn more about the WEP and the minimum “significant earnings” amounts for previous years by clicking here.
There may be hope on the horizon, however. Certain lawmakers have put forward a proposal to rewrite the WEP in a way more favorable to public employees, including police officers and firefighters. It remains to be seen whether the effort will gain momentum in Washington, DC, but if it does, it could make the retirement picture a lot brighter for many first responders who are currently subject to the WEP.
At Mathis Public Safety Retirement, we want you to have all the information you need to make smart decisions about retirement and other important financial undertakings. To learn more, read our recent article, “Hiking the Back Country and Preparing for Retirement: How They’re Alike.”