Windfall Elimination Provision Could Change Social Security Benefit
The Windfall Elimination Provision is also something that American expats must become familiar with. The WEP affects American expats if they earned a pension from a foreign government and are also eligible for US Social Security benefits. Typically, this would be Americans who work abroad for a foreign employer, but also contributed to the U.S. Social Security System in the past.
Without the WEP, the worker would effectively be double-dipping by receiving benefits from both plans. In an extreme case, a retiree could work two half-careers and get almost two full pensions. The WEP is used in determining all benefits on the record, both for the primary beneficiary and any auxiliaries. This includes an effect upon the maximum total benefits paid on the record as well. Since the WEP does not apply after the death of the primary beneficiary, it is never used for Social Security survivor benefits.
The Thrift Savings Plan
The TSP is a defined contribution retirement plan similar to the 401 plans provided by many private-sector employers. The TSP is a key component of FERS, especially for workers in the middle and upper ranges of the federal pay scale, who are unlikely to achieve adequate retirement incomeâas measured by the replacement rateâfrom Social Security and the FERS basic annuity.
In 2019, federal employees can contribute up to $19,000 to the TSP.14 Employees aged 50 and older can contribute an additional $6,000. These employee contributions may be made on a pre-tax basis, in which case neither the contributions nor investment earnings that accrue to the plan are taxed until the money is withdrawn. Alternatively, P.L. 111-31 authorized a qualified Roth contribution option to the TSP. Under a Roth contribution option, employee salary deferrals into a retirement plan are made with after-tax income. Qualified distributions from the Roth TSP plan optionâgenerally, distributions taken five or more years after the participant’s first Roth contribution and after the age of 59½âare tax-free.
TSP participants are immediately vested in their contributions to the plan, all federal matching contributions, and any interest, dividends, or capital gains attributable to those contributions. Participants are fully vested in the 1% agency automatic contribution to the TSP after three years .
Table 2. Government Matching Rate on TSP Contributions by FERS Participants
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Two Types Of Retirement Plans
Employers establish retirement plans both to help them attract workers with valuable skills and to enable older workers to retire without facing the prospect of inadequate income. Employers must balance the goals of providing adequate retirement income with controlling the cost of the retirement plan. For private-sector employers, another important consideration is the regulatory environment in which their retirement plans must operate. Private-sector retirement plans must comply with the relevant provisions of federal law, including the Employee Retirement Income Security Act , the Age Discrimination in Employment Act , and the Internal Revenue Code.
In a defined contribution plan, the employee bears the investment risk. For example, if the contributions to the plan have been insufficient or if the securities in which the contributions have been invested lose value or appreciate too slowly, the employee might reach retirement age without the financial resources needed to maintain his or her desired standard of living in retirement. If this occurs, the worker might have little choice but to delay retirement.
CSRS is a DB plan that provides a standalone annuity. FERS includes both DB and DC plan elements .
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Who Can Qualify For Social Security Benefits
To qualify for Social Security retirement benefits, in most cases:
- You must be 62+ years old, or disabled/unable to work, and
- You must have sufficient credits earned throughout your working life.3
To qualify for Social Security spousal retirement benefits:
- You must be married to a retired worker , and
- You must have a child under age 16 or a disabled child in your care, or
- You are 62+ years old.2
To qualify for Social Security disability benefits if you are under the age of 62:
- You must be 18+ years old and unable to work due to physical or mental disability, and
- Your condition is expected to last at least a year or may result in death.3
You may still qualify for Social Security disability benefits without earning the required 40 credits, depending on the circumstances. Your lifetime earnings and benefits help determine your monthly disability benefit amount.
To qualify for Social Security survivors benefits:
- You must be a widow or widower who is 60+ years old , or
- You must be a widow or widower caring for the deceaseds child who is under the age of 16 or disabled, or
- You must be a surviving divorced spouse , or
- A dependent parent who is 62+ years old, or
- You must be an unmarried child of the deceased and are:
- Under 18 years old , or
- 18+ years old with a disability that occurred before you turned 22.3
If You’re Not Sure Why You Received A Payment
If you receive a check or direct deposit payment from the Treasury Department and do not know what its for, contact the regional financial center that issued it.
If you received a check, look for the RFCs city and state at the top center. Then contact that RFC to find out which federal agency authorized the payment. It will be one of these:
If you received payment byelectronic funds transfer , or direct deposit, follow the directions under Find Information About a Payment.
Use the Treasury Check Verification System to verify that the check is legitimate and issued by the government.
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Understanding Social Security Benefits
Social Security forms an important part of most people’s retirement plans, but the program itself does much more than just that. In a nutshell, Social Security is designed to support disabled and retired workers and their families by providing a guaranteed source of lifetime income for those who meet certain criteria.
Here’s a closer look at how the program works, the different types of Social Security benefits available, and what you can expect when you’re ready to claim benefits.
Spouse’s Benefit And Government Pension Offsets
The spouse or divorced spouse of a retirement beneficiary is eligible for a Social Security spouse benefit if the spouse or divorced spouse is 62 or older. The benefit amount is equal to 50 percent of the retirement beneficiary’s Primary Insurance Amount if the spouse claims the benefit at the full retirement age or later. If a person is eligible for both a retirement benefit based the person’s own work in Social Security covered employment and a spouse benefit based on a spouse’s work in covered employment, SSA will pay a total amount approximately equal to the higher of the two benefits. For example, if at the full retirement age, a spouse claims a retirement benefit of $300 and a spouse benefit of $450, SSA will pay the person a $300 retirement benefit and a $150 dollar partial spouse benefit for a total benefit of $450.
A spouse is eligible after a one-year duration of marriage requirement is met and a divorced spouse is eligible for spousal benefits if the marriage lasted for at least ten years and the person applying is not currently married. Payment of benefits to a divorced spouse does not reduce the Social Security benefits of the retired worker or family members of the retired worker, such as the worker’s current spouse. A divorced person can claim spousal benefits once the former spouse is eligible for retirement benefits, regardless of whether the former spouse has claimed those retirement benefits.
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Total Benefits Paid By Year
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Workers in Social Security covered employment pay FICA or SECA taxes and earn quarters of coverage if earnings are above minimum amounts specified in the law. Workers with 40 quarters of coverage are “fully insured” and eligible for retirement benefits. Retirement benefit amounts depend upon the average of the person’s highest 35 years of “adjusted” or “indexed” earnings. A person’s payroll-taxable earnings from earlier years are adjusted for economy-wide wage growth, using the national average wage index , and then averaged. If the worker has fewer than 35 years of covered earnings these non-contributory years are assigned zero earnings. The sum of the highest 35 years of adjusted or indexed earnings divided by 420 produces a person’s Average Indexed Monthly Earnings or AIME.
The AIME is then used to calculate the Primary Insurance Amount or PIA. For workers who turn 62 in 2021, the PIA computation formula is:
90 percent of the first $996 of average indexed monthly earnings, plus
32 percent of average indexed monthly earnings between $996 and $6,002, plus
15 percent of average indexed monthly earnings over $6,002
Monthly benefit amounts are based on the PIA. Once the PIA is computed, it is indexed for price inflation over time. Thus, Social Security monthly benefit amounts retain their purchasing power throughout a person’s retirement years.
Congress Must Act Sooner Rather Than Later
In theory, the AWI problem could be fixed anytime before 2022, when, for example, workers who turn 60 this year are first eligible to retire at the age of 62. But that delay would cause significant anxiety for these workers, whose future benefits would be at risk. Moreover, people decide when to retire based on projections of their incomes in their initial year of retirement and in the remainder of their lives. It would be most unfair to workers decision-making processes to have the expectations of their future incomes be uncertain for some period of time while they are trying to make such an important decision.
Congress needs to act sooner rather than later to ameliorate this problem. One possibility would be to include a fix in the stimulus legislation to cope with the economic effects of the COVID-19 pandemic that Congress is currently considering.
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What Is A Social Security Card
Your Social Security card is an important piece of identification. You’ll need one to get a job, collect Social Security, or receive other government benefits.
When you apply for a Social Security number , the Social Security Administration will assign you a nine-digit number. This is the same number that is printed on the Social Security card that SSA will issue you. If you change your name, you will need to get a corrected card.
What If I Continue Working In My 60s
Many people whose health allows them to continue working in their 60s and beyond find that staying in the workforce keeps them young and gives them a sense of purpose. If this sounds like something youâd like to do, know that working after claiming early benefits may affect the amount you receive from Social Security. Why? Because the Social Security Administration wants to spread out your earnings so you donât outlive them. If you claim Social Security benefits early and then continue working, youâll be subject to whatâs called the Retirement Earnings Test.
If youâre between age 62 and your full retirement age, and youâre claiming benefits, you need to know about the Earnings Test Exempt Amount, a threshold that changes yearly. For 2021, the Retirement Earnings Test Exempt Amount is $18,960/year . If youâre in this age group and claiming benefits, then every $2 you make above the Exempt Amount will reduce by $1 the Social Security benefits you’ll receive.
Contrary to popular belief, this money doesnât disappear. It gets credited back to you – with interest – in the form of higher future benefits. You may hear people grumbling about the Social Security âEarnings Taxâ, but itâs not really a tax. Itâs a deferment of your benefits designed to keep you from spending too much too soon. And after you hit your full retirement age, you can work to your heartâs content without any reduction in your benefits.
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Applying For Social Security Benefits
Social Security offers an online retirement, disability and Medicare application that you can complete in as little as 15 minutes by visiting: apply for retirement or Medicare only or apply for disability benefits.
It is so easy. Better yet, you can apply from the comfort of your home or office at a time most convenient for you. In most cases, once your application is submitted electronically, youre done. There are no forms to sign and usually no documentation is required. Social Security will process your application and contact you if any further information is needed.
You can apply online for retirement benefits if you:
- are at least 61 years and 9 months old
- are not currently receiving benefits on your own Social Security record
- have not already applied for retirement benefits and
- want your benefits to start no more than 4 months in the future.
This service is only for individuals applying under their own social security number.
If that is not your case, please request an appointment by completing our internet inquiry form.
Social Security Benefits for foreigners or non-U.S. Residents
If you are not a U.S. resident or a U.S. citizen, but worked over 10 years in the U.S., under your own Social Security number and are over the age of 62 and you would like to inquire about your eligibility to U.S. social security retirement benefits you can submit your inquiry completing our internet inquiry form.
Will A Government Pension Impact My Retirement Benefits
If you worked for an employer that didnt withhold FICA taxes from your salary, such as a government agency, the pension you receive based on that work may reduce your Social Security retirement benefits. This reduction, as part of the windfall elimination provision , affects individuals who earned a pension in any job where FICA taxes werent paid and who worked in other jobs long enough to qualify for Social Security retirement benefits.
In addition to a reduction in individual benefits, spousal and/or survivor benefits may also be reduced accordingly. In this case, Social Security benefits will be reduced by two-thirds of the government pension.
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Are States That Tax Social Security Benefits Worse For Retirees
Including Social Security benefits in taxable income doesn’t make a state a more expensive place to retire. According to the Missouri Economic Research and Information Center, as of Q3 2021, while four of the states that tax Social Security benefits have notably high cost-of-living index scores, the remaining eight fell within the two lowest-scoring groups. Kansas, in particular, had the second-lowest score in the U.S., after Mississippi.
The inverse is also true, as states that don’t levy a Social Security tax aren’t inherently tax-friendlier places to live. When a state government doesn’t garner income from one potentially taxable source, it typically makes up for it with other forms of taxation.
For instance, while Texas doesn’t levy a state income tax at all , it relies heavily on taxes from a variety of other sources, including insurance taxes sin taxes on mixed beverages, tobacco products, and “coin-operated machines” and motor fuel taxes.
Other states that don’t earn revenue from Social Security incomesuch as New York, California, Louisiana, and Arkansashave some of the highest income and/or sales tax rates in the U.S.
Living in a state that levies fewer taxes may be good for your budget, but it can limit the local government’s ability to invest in social services that you or your loved ones may rely on, such as healthcare, infrastructure, and public transportation.
Social Security Benefits For Children
More than four million children receive Social Security benefits each month because one or both of their parents are disabled, deceased or retired.
These funds help stabilize families and children at a critical time in their lives, helping them to complete high school and give them a good start toward college or being able to work full time with a high school diploma.
Biological, adopted and dependent step-children are eligible to get benefits if they meet certain criteria:
- At least one parent who is disabled or retired and eligible for Social Security benefits.
- A parent who passed away after attaining enough work credits in a job where he or she paid Social Security taxes.
- The child must be unmarried and under age 18, or
- 18-19 years old and a full-time student who is in no higher than grade 12. College students are excluded.
- 18 years or older and disabled.
When a child meets these criteria and a parent begins receiving Social Security retirement benefits, the child may be eligible for up to half of the parents full benefit amount or 75 percent if the parent is deceased. However, there is a maximum amount per family that ranges from 150 to 180 percent of the parents full benefit amount. When payments exceed this threshold, each family members benefit is reduced proportionally until the total is equal to the maximum amount allowed for the family.
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How To Understand Social Security Retirement Benefits
Social Security, managed by the U.S. federal government, pays benefits to retirees. Social Security benefits are one part of a broader retirement plan. These benefits can supplement other sources of retirement income, such as 401s, individual retirement accounts or other retirement savings plans.
Is My Social Security Income Taxable The Quick Answer
According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income .
If your combined income is above a certain limit , you will need to pay at least some tax.
The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.
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