The US is in the middle of the biggest retirement wave in its history. The post-war baby boom saw its birth rate peak in 1957, meaning that Baby Boomers born in that year are turning 67 in 2024 and a huge number of them are retiring this year as they are at the full retirement age for social security. Retirement is always a tricky situation, especially when it comes to pension, tax, and social security matters. However, there is a specific situation that many who are affected and their financial advisors don’t know about until they are shocked to learn that they will be receiving benefits far below what they expected.
George McReynolds, CFP®, founder of wealth management firm Protective Wealthcare, says that many public safety workers, such as police, firefighters, and EMS first responders, are vulnerable to what is known as the Windfall Elimination Provision (WEP) and Pension Benefit Offset (PBO) for their spouse. These could result in the retiree’s social security retirement or survivor benefits being reduced, much to their disappointment.
According to McReynolds, when the US’s Social Security System was established in 1935, workers with existing pensions, such as railroad workers and municipal and state police and fire personnel, were permitted to be exempted.
At its most basic, an employee and their employer contributed a certain percentage of wages to social security and, based on what was paid into the system, the employee will be able to take it out as a benefit after retirement. However, in 1977, Congress amended the system to include bend points, where employees paid the same amount, but they took out more for their lower wages and less for their higher wages. Then in 1984, Congress made a law creating WEP and PBO. The former reduces the social security benefits of first responders who did not have to pay into Social Security for their main job because they paid into their individual pension funds. Meanwhile, the latter reduces the spousal benefit. This could result in up to a 60% reduction in the Social Security benefit for the work that they did pay at the same rate as everyone else.
McReynolds shares an example scenario:
Paul, a recently retired city fireman, served in the Air Force for four years between the ages of 18 and 22. Prior to becoming a firefighter, he worked as a plumber's helper and occasionally did part-time work installing hot water heaters, as well as other side hustles, while a fireman. At age 25, he started at the fire department for about $5 an hour. He worked there for 30 years, being promoted to Captain and Assistant FMO (Fire Marshal’s Office) while paying into his pension plan. At 55 years old, Paul retired after 30 years of service with the fire department.
Post-retirement, Paul became a cause and origin investigator for a large insurance company, receiving an annual salary of $125,000. He and his employer began paying the full amount of social security again (12.4%), just as he did with his Air Force service, pre-fire department jobs, and side hustles. In total, he had 20 years of employment paying into Social Security at the same rate (12.4% with employer match) as everybody else, but his benefits were reduced by 60% upon retirement.
According to McReynolds, WEP causes two huge problems. First is that retirees like Paul often don’t know about WEP until it’s too late because, if he checks with his Social Security statement, it does not reflect the reduction in the benefit. In fact, he probably won't find out until he actually goes to Social Security and tries to set up his monthly benefit. Furthermore, McReynolds says that most financial advisors aren’t aware of it, as well. Paul was counting on receiving the full amount of Social Security, including a spousal and survivor benefit, but he ended up receiving much less than he planned for.
McReynolds says that retirees in this situation need to know two things: first is that they can calculate the actual reduction from WEP and PBO based on their earnings history from the Social Security statement. Second, the benefit can be restored partially or in full by adding substantial earning years. In Paul’s case, if he put in another year of work, even just part-time, the benefits could be partially restored.
“Despite serving for 10 years myself as a paramedic and police officer, I was initially unaware of the various retirement issues faced by first responders,” McReynolds says. “Now, as a Certified Financial Planner, several of my friends who were also first responders would ask me questions, which led me to do research on issues such as WEP and PBO and how it affects their retirement and finances. This is why it’s important to consult an expert who specializes in financial planning for public safety professionals, such as Protective Wealthcare, even prior to retirement. This will help pre-retirees to identify any potential obstacles and take appropriate action to prepare for and mitigate these challenges.”
Securities and Advisory Services offered through LPL Financial, registered investment advisor. Member FINRA/SIPC
Name: George McReynolds
Email: [email protected]
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