Many professors, researches, and employees take jobs at universities without the knowledge that their institution does not withhold Social Security taxes from their salary. This may apply to an entire university, such as Colorado State University or in the case of the University of Colorado, it may only apply to certain classes of employees. If you do work for an employer that does not pay into Social Security, the Windfall Elimination Provision (WEP) may affect your Social Security retirement benefit. Assuming you are eligible for Social Security benefits from a previous employer, any pension or retirement benefit you receive from that work may reduce your benefit. If you have worked at one of these institutions your entire life, do not get caught off guard when you are not eligible for Social Security benefits.
Why Does it Exist?
The WEP was enacted as part of the Social Security Amendment Act of 1983 with the intent of limiting the benefits of those individuals who qualify for both Social Security benefits and a pension from non-covered employment (non-covered employment meaning your employer does not pay into Social Security). Since Social Security benefits provide a higher replacement rate when the average of covered earnings is lower, the act assumes that an individual receiving both Social Security and a non-covered pension would receive a combined higher benefit or a “windfall”. Hence, the WEP works to eliminate that windfall. The merits and the fairness of the act are subject to argument.
Does it Apply to Me?
If you work at an institution that does not pay into social security and have less than 30 hours of substantial earnings paying into Social Security, then retirement benefits received through the non-covered institution will most likely reduce your Social Security benefit. In some cases, a pension is received and the reduction is a straight forward, although complicated, calculation. In other cases, a non-covered institution, such as Colorado State University, will make contributions to a defined contribution plan. In this situation, there is often confusion regarding whether a lump sum withdrawal or rollover of these assets to a Traditional IRA will reduce Social Security benefits. The answer is less than clear, but there is precedence to assume that Social Security Administration will complete a calculation based on life expectancy and the value of the account as if a pension was taken to then reduce Social Security benefits. It is extremely important for employees of non-covered institutions and their financial professionals to be aware of these rules and plan accordingly. An unexpected reduction of Social Security retirement benefits could be a costly financial planning mistake.
What Should I do Next?
Non-covered employees need to be aware of how to project their Social Security retirement benefits in order to properly plan for income in retirement. You can start by calling Social Security Administration. I recommend calling your local office since they are used to working with individuals at your institution and may have a better grasp of the nuances of your institution’s retirement plan. Of course, working with a financial planner familiar with the Windfall Elimination Provision will make planning for retirement more accurate and provide piece of mind.
As the leading national Wealth Management Advisor working with individuals in the academic, medical, and cultural fields, Kevin McNab is The Professor’s Advisor. Kevin received a B.B.A in Finance from Western Michigan University and a Masters in Finance from the University of Colorado. Kevin has demonstrated his commitment to his profession by earning the financial industry’s top credentials: Certified Financial Planner™ (CFP®) and Chartered Financial Consultant (ChFC®) accreditations.
