CSRS employees approaching retirement are almost always in a good mood until they learn about two provisions of law that can reduce their expected retirement benefits. While these provisions won’t reduce their CSRS annuity, they always reduce – and sometimes eliminate – any Social Security benefit to which they may otherwise be entitled. The villains are the Windfall Elimination Provision and the Government Pension Offset. Just call them the WEP and the GPO.
The WEP reduces the Social Security benefit payable to nearly all CSRS employees who will be receiving an annuity from a retirement system where they didn’t pay Social Security taxes. As a result, they’ll have a modified formula used to compute their Social Security benefit. Only those with 30 or more years of “substantial” earnings under Social Security will receive a full benefit. The rest will receive a smaller amount, usually much smaller.
To see how you might be affected, let’s look at the formula used to compute the benefits of employees who aren’t affected by the WEP. For example, if you are a CSRS Offset or FERS employee who turned 62 in 2004, the formula would look like this:
- Your first $612 of average indexed monthly earnings (AIME) would be multiplied by 90 percent;
- Everything from $612 to $3,689 of the AIME would be multiplied by 32 percent;
- AIME above $3,689 would be multiplied by15 percent.
The total of these three multiplications when adjusted by your total years of Social Security coverage would be your monthly pension from Social Security.
However, if you are a CSRS employee, the WEP will reduce that 90 percent factor by 5 percentage points for each year of substantial earnings fewer than 30. Fortunately, the reduction bottoms out at 40 percent for those who have 20 or fewer years of substantial earnings, otherwise CSRS employees with limited Social Security coverage would get nothing. As it is, the maximum reduction works out to be just above $300 a month.
To meet the substantial earnings criterion, you must have earned a lot more per year than the amount needed to earn Social Security credits. For example, in 2003 you’d only have to earn $3,600 to get a full year’s credit (four quarters) from Social Security. However, to receive credit for substantial earnings, you’d have to make $16,275.
The GPO only hits those who will receive an annuity from CSRS and have a spouse who will receive one from Social Security. In most cases, the Social Security benefit to which they would be entitled will be reduced or eliminated. If you are a CSRS employee – not CSRS Offset or FERS – the GPO will reduce your Social Security spousal benefit by $2 for every $3 you receive in your CSRS annuity.
So, if you are eligible for a monthly CSRS annuity of $1,800, two-thirds of that – $1,200 – will be used to offset your monthly Social Security spousal benefit. If that benefit was $1,300, you would receive only $100 a month from Social Security. That’s because $1,000 subtracted from $1,100 leaves a positive balance of only $100.
The larger your CSRS annuity, the less you’ll receive from your spousal benefit. For example, if you had a monthly CSRS annuity of $2,400 and a monthly spousal benefit of $1,200, you wouldn’t get anything from Social Security. Two-thirds of $2,400 is $1,600. Subtracting that from $1,100 leaves you with zip. Because CSRS annuities are usually much greater than Social Security spousal annuity benefits, the GPO usually wipes out the latter benefit.
While there have been moves in Congress to completely eliminate the WEP and the GPO, that’s highly unlikely. However, there is always a chance that they may be modified. Keep a good thought.