When people hear the word ‘penalty’, they automatically assume it’s a bad thing.
But when it comes to Social Security, that isn’t necessarily the case.
In this episode, Matt Johns, CFP®, an employee at Capita Financial Network, discusses Social Security penalties which can help you discover which ones may apply to you in the future.
Matt discusses:
[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have, whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. All right, welcome back. We are in season two, episode five, just a reminder. This season is all about Social Security. And today we were talking about different penalties that some people may have on their Social Security benefits. And this is the WEP, the GPO we brought in one of our experts, our Social Security experts, Matt Johns is with us today to help us out. Yeah, I was excited to join. I'm probably the only one that's gonna be excited. That's listening to this or talking about it, because this topic, if you're here listening to this, you're not here because you just wanted something to learn about social. It's probably pretty specific that you're here to listen, but good stuff it's
[00:01:00] important to know about. So I'm glad to join. If you are subject to WEP and GPO, this is a huge deal for you and you're not happy about it. If you aren't subject to it, it's like, whatever. You're fine. Move on. Didn't even know. And they hear penalty. They automatically think it's a bad thing, but it's not necessarily a bad thing. Penalties aren't fun. But we'll talk about why you have this penalty. Maybe some of the advantages that you have because of this penalty. Good point. So should we just dive right in? I think we do it. Okay, awesome. So the WEP penalty, it's the windfall elimination provision. This is the penalty that you. On your personal Social Security benefits. So some people may ask, why would I have this penalty? What is it for the reason being this is for people who have opted out of Social Security. So we've talked about this before people pay Social Security tax that comes right outta your payroll taxes. And that goes into the Social Security program. Well, some people don't pay that Social Security tax and instead of paying that.
[00:02:00] Their employer will give them some sort of pension to compensate for that. And because of that, the government says, well, it's not fair that you're getting a pension and you're not paying into Social Security and you still get your full Social Security benefits. They decided that's not fair. So they decided to reduce your Social Security benefits a little bit. And this is where the WEP penalty comes into play. And only some employers are even. To do this. Most employers don't have a choice. You can't just say like Capita, couldn't say, Hey government, we're done with Social Security. We're cool with the WEP. We just wouldn't have that option. You have to be affiliated with the government typically and under a certain status. And then you can have your employees opt out. It's tricky though, because sometimes employees don't understand the ramification of this. And by sometimes, I mean, always. They rarely understand what it means when you're working for an employer and not paying Social Security taxes. Even if you just go a tiny bit with that employer, you open the door to these penalties that now are triggered on your benefit. So it's important to understand a hundred percent. And I was
[00:03:00] gonna say too, I feel like when I've talked to employees that are younger at some of these employers that do this, they all talk about like, well, of course I'm gonna opt out and I want to, that's a good thing because Social Security's not gonna be there. When I go to retire, the reality is, we don't know, and you don't wanna make your basis for what you're gonna do. Just off of what somebody in the office said to you in the break room about whatever their belief is about a social program that we have. So it's more so it's important that you kinda understand what the penalty is. And I think that you'll know if you have it, because your employer's gonna make you aware of it to Zacc's point. It's not something that you just go work for a mom and pop shop and they're like, yeah, we just decided we're not doing that. They're not gonna let that a lot of people would if they had the choice, a lot of people would. So that's probably a theme to understand if you are subject to we or GPO, it's not the end of the world. And many people would actually choose to be in your situation. And get the pension benefits from your employer and be subject to these penalties on Social Security. Exactly. So let's talk about it. How much is this penalty? How much is it actually going to affect me? Well, if you
[00:04:00] can remember back to our episodes, when we were discussing how your Social Security is calculated, we talked about different bend points and this gets really complicated, but basically if you remember, you get 90% of your first. Thousand dollars that you put into Social Security, basically your average earnings, they give you 90% back into your Social Security benefit. Well, if you have this WEP penalty, it reduces that percentage down to 40%. So that's the technical calculation for it in more basic terms right now, the full WEP penalty is $512 a. So, if you were to take Social Security, now say your benefit's 1500 Matt. They're gonna reduce that by $512. And you're left with about a thousand dollars a month. And the way I've always cheated on this, you guys, is I don't find out what the pinpoint is and what it went up. There's a chart on Social Security, ssa.gov. If you search windfall elimination provision. Of course, because we work on this every day. I just have it bookmarked. Zacc's gonna test me out and see if it's actually easy to
[00:05:00] search. No, no, no. I love this. I think this is an incredible two pager. It's really good. We don't like it very much sometimes. I mean the government doesn't do a lot of things. Well I think everybody shares that opinion. Right, right, right. But apparently this two pager they've done. Fantastic. Done. Good. And it's a great reference point. If you're wanting to see because in between, depending on how many years of service you have. That pinpoint can be reduced. So you won't necessarily have it always be at that 40% reduction extra years. You work could reduce that. And so this is just a very digestible chart that tells you where you're. And that takes us to the next point. The second that you opt out of Social Security, you have this full WEP penalty. However, if you work a good amount, you can start to work through this penalty. So what does Social Security say? Okay. Once you've paid into the Social Security system for at least 20 years of substantial earnings, right now that amount is about 27,000 back in 1990, that amount was. 9,500, just to give you a
[00:06:00] general idea of how that works. If you've paid into Social Security, 27,000, that counts as a substantial year of earnings paying into Social Security. Once you have 20 of those, they start to reduce that penalty every year. After 20 years that you pay in substantially, it reduces your penalty by about 10% each. It's about $50. Yeah. So every year that you work and earn more than $27,000 of earnings, your penalty will no longer be around 500. It might be roughly 450. And we're rounding because numbers over the years are hard to keep track of. But you know, don't hold us to those exact numbers, but we're close on those. Yeah, exactly. Once you've hit 30 years of substantially paying in you no longer have that WEP penalty, so you can work through it, which is nice. Something else to be aware of. There is a limit on your WEP penalty. Say you only opted out of Social Security for one year and you got a tiny little pension from that. The Social Security office is gonna compare half of your pension to the full WEP penalty. And if half of your pension is
[00:07:00] less than that full WEP penalty, they'll give you the lesser of the two. I had this with a gal, so she hadn't worked for 30 years. She had worked about 23, 24 years. I can't remember. And she had a pension that the value of her pension we figured was about $160 a month. And so her WEP penalty was actually going to be several hundred dollars without considering the value of the pension. But then when we went to the Social Security administration and said, but her pension is only $160 a month, they reduced her WEP penalty from the 300 and change down to $80, half of her pension amount, which was nice because in reality, it's important to understand these things because she was trying to figure out how much she should pay into Social Security over those years to try to earn through it. It's like, well, it doesn't actually matter your substantial earnings. None of that matters because your pension is so small, they're just gonna use half of your pension anyway. So as you strategize through
[00:08:00] this, most people don't understand it, the Social Security administration, except for a couple people who don't probably even talk to customers, most of them don't understand this. It can be very complex. We do have a. On your statement, they give you a list of all your earnings, all your earnings record over the, your whole life. We talked about this in episode two of this season, how your benefits are calculated. We can take those numbers and throw it in this calculator. It's alright. That was really funny. It's going great. We're going to use a calculator. Just sit down. Momentum's there, but now he's flustering. You guys don't know, but Matt really held back. He wanted to destroy me on that one. Matt is a. Okay. So anyway, we have this calculator you put in your substantial earnings, and then it will tell you what your WEP penalty is. We can run that for people if you'd like, and then also throw in your pension and help you to know what you should be thinking about. And the pension calculation can be complicated as well. Some people's pension is easy. It's just this monthly amount. So it's easy to
[00:09:00] calculate it. Other people's it might be kind of enveloped into their 401k or their 403 B and it's just a lump sum. And you can't really tell. And if you even talk to somebody at their HR, About well, what's my pension. They're like, well, you tell me, so there's a certain part of it that it's a complicated area to be into. And there's not a ton of people that know what's going on. Even the Social Security experts that like we've worked with, we try to do a lot of continuing ed ourselves proactively to try to do it. And a lot of the experts in the industry are like, oh, they're apprehensive to take a line on it, to where we're finding more and more, the more we meet with clients, the more we do research, the more we're finding like. We know as much as anybody does in it to where it's good to be able to arm clients or just people that come in for Social Security consultations to know they're not getting taken advantage of and they know what their opportunities are. That same gal had a 401k in pension that on her statement, they looked all lumped together and her 401k was 350,000. Her pension was
[00:10:00] 60,000. Wow. And the Social Security administration wanted all of those balances to be considered as one big pension. But the 401k was her own contributions for just normal contributions with growth. Yeah. With all the growth. If that was part of her pension calculation, she's basically being penalized for being good. Over the years for saving and being a good investor. So we had to work really hard with the Social Security administration to have them isolate all of her 401k and just consider the pension, which is why her monthly, you know, at $60,000, her monthly was so low. Had they thrown all that 400,000 in change in, she would've had a monthly benefit that was high enough. She'd be paying an extra couple hundred dollars a month in WEP penalties. It was super important to understand exactly what you guys are talking about. They didn't give her a monthly calculation. Now a lot of pensions do have a very clear here's your monthly benefit, but when they give you a lump sum and there's not actually a monthly calculation, that can be really complicated. And if you're wondering, like where those lump sums are coming from. With that
[00:11:00] FICA taxes that we've talked about in the past, there's a portion that your employer pays. And if you opt out of the employer's saying, well, we'll just go ahead and put that into a retirement account for you. We are already planning to save it. So a lot of the time that's where you get that number from. So quick review of the WEP penalty. This is a penalty on your personal Social Security benefits. The second you opt out of Social Security, you have it right now. It's about $512 a month. You can work through the penalty. If you have 30 years of substantial earnings, you can have that penalty completely erased. And there are limits based on your pension. That that penalty can be. Those are the basics of the WEP. Did I miss anything to anything we wanna add in there? Nope. Okay, awesome. Well, let's move on to the GPO, the government pension offset. This is a penalty that's on your spousal and survivor Social Security Benefits. This one's confusing because it took me a while to figure out. That these penalties are applied to the same person. The weapon, the GPO are both applied to the same person who opted out of
[00:12:00] Social Security, but they're just applied to different benefits. The WEP is on the personal benefit that this person, this worker may apply for. But if that same worker who opted out of Social Security applies for a spousal or a survivor benefit. The WEP does not apply to those. The GPO applies to those, the government pension offset. In the beginning, I got super confused. I was thinking, wait a sec. So who's the spouse and who's the, is it the non worker, spouse getting subject to GPO and it can get you all turned around or you have a spouse pass away that was subject to a government pension offset. And you'd be like, well, she's gonna have that now too. And it's like, well, no, it stayed with him. Yeah. It's super confusing. So the bottom line is, remember that the GPO is. The government pension offset and it's applied to survivor and spousal benefits when the affected worker applies for those. Yeah. So only the person who opted out of Social Security has these penalties. And you think about it, they're just trying to close a loophole. Laura led into it at the first. So the government's saying, well, if you didn't pay [00:13:00] into it and you're collecting this nice pension, because you didn't pay into it. We're not gonna give you an extra benefit, just because, well, now they're saying, well, I'm sure at some point they did pay for this. They did. And they finally closed the loophole and they closed the loophole because they're like the only people that are taking advantage of it are dual income households where the spouse has a nice Social Security benefit and they file off it. So they're just trying to level the plane field. If the person who opted out of Social Security, that primary worker, if they have a spouse who's entitled to a spousal benefit off of them. Their spousal benefit. Their spouse does not have a penalty on those benefits, which is where it gets super confusing. Yes. Right there. yeah. I hope I didn't confuse about no, no, no. You said it exactly. Right. You have to replay that a couple times. Like wait, wait, who? And the bottom line is, if you're affected by these benefits, you probably should chat with us. We'd be happy to do a free consultation or find somebody who understands these benefits really, really well. I think you did a great job. I just think it's a confusing subject. It is really confusing. Only the person who opts out has the penalty. Just repeat that. I like to yourself.
[00:14:00] okay. So the government pension offset, what is it? How much is this penalty? This one is two thirds of your pension that you're getting. So we talked about calculating your pension, how much that will be with the WEP. This one is two thirds of that can be taken away from your SP or survivor benefits. If that pension two thirds of your pension is more than that spousal or survivor benefit would. You don't have a benefit. It can completely wipe it out, which is brutal. I've seen pensions of $2,400 and my spouse is eligible for like a thousand dollars spousal benefit, you know, a $2,400 total pension, two thirds of that is $1,600. I mean, it just wipes it out entirely. And they're left with nothing. So this one's hard because it's not a hard calculation. I'd almost prefer they complicate the calculation because it would give us a chance to have a couple people earn through it or get other benefits. But like, this is a simple calculation, but it's awful because it just wipes out benefits like crazy. Yeah. You can't work through
[00:15:00] this one. So even if you have 30 years of substantial earnings, you're still gonna have this. However, it is limited to your pension. So if you only have a small pension. Then this GPO penalty is not gonna be as large. And I think something that's important and we've alluded to It. I don't know if we've quite hit it, but with regards to what you're looking at from a penalty, the government's always looking at it as a monthly benefit. So Zacc, you even said that gal that you worked with, she had a $60,000 pension lump sum lump sum. So it was a lump sum. So then the government then uses an advisor that can change, can be different. We found as it's come back, we found sometimes it can be a little more, a little bit less, but they're basically coming down to what's a monthly benefit we think is what you'd be entitled to off of that 60,000. So. It's important to know that because if you're sitting there thinking, well, if I'm getting a lump sum for my pension, how do I calculate two thirds of that? Just like, you'd be the, web's a little more clear because of the year served, but it could be less just always remember that they're getting it down to a monthly benefit and then they're even if you have a lump sum, the Social Security administration is
[00:16:00] calculating a monthly benefit. I think I spent like four, five years. Because at Capita, we do a lot more financial planning around this topic, Social Security planning than I did before I came here and I spent like three or four, five years looking for what you're talking about because it kept running into it. The investor at retiree didn't know their monthly benefit and they had a lump sum and somehow were supposed to help them do all this math off of a monthly Benefit. and I found, I was just guessing. And so we used rough estimates from other pensions we've seen anyway. It was about a year ago, two or three years ago. I can't remember somewhere in the deep dark web of SSA docs. I totally found it. Oh my gosh. Yeah. It's in our tool. Sorry that came across wrong. I used to use an estimated rounded benefit number in our tool, but I actually found the tables for each aid star and it's a brand new sheet. It's like one of the back hidden sheets within the tool. Look at this, that we go over and find it and pull it back. So anyway, it. It was one of those discoveries that you're just like, I found gold. I found the Easter egg. Here. It is here. It is. Those are
[00:17:00] Zacc's Easter eggs. This is sad. Yeah. Zacc, what a sad thing. I told Michelle and Michelle was like, you did what? Yeah. What are you talking about? What you're talking about. I don't know. What are we going to do? Or what are you still doing? Exactly. Close your computer. Yes. We found him, Matt. We found it. So that's exciting. So it's a table, it's an and table. There's an actual table. So it goes based on year of birth and the actuarial, you know how old you are, kinda like your RMD table. Totally. It's very much like the RMD, which for those of you who are listening, may not know at a certain age, they make you take money out of your retirement accounts at 72, as of right now. And they have a table for how much you have to take out based on your age, there's an advisor that they use and they figure out exactly what your monthly benefit is. And to your point, you were exactly right. The percentage varies. You just have a lot of experience with seeing it, but the percentage varies based on you maybe didn't know, but it was on the age. I knew, I knew for the case of all the listeners I knew, but Z and Laura might be better to meet with no. if you do call in. So not true. Okay. So then what do you do
[00:18:00] about it? So we've talked about a couple of examples. There is a local employer, which we try to be careful of names and things. If you're there, you'll know what goes on here, but it's a cool strategy where. In the middle of the year, the middle of the calendar year, they allow their employees to choose between opting in or opting out. And if they opt out of Social Security, they give half of the FICA taxes that they would have to pay to the government inside what you were talking about inside their 401k plan and their retirement plan. That's kind of considered their pension, which is why it turns into a lump sum. That's super confusing, but it's a really cool benefit. And then if they opt into Social Security, they don't do that contribution for their pension. Now, if you have someone who makes, did you say it was 27,000 substantial earnings. So if you had someone who makes about $55,000 a year, they could opt out in the half year point, so they could opt out and be out in July through the end of the year, still have earned enough for substantial earnings, but get that extra match for the second half of the
[00:19:00] year. And then at the beginning of the next year, they're still out. And then midway through the year they opt in and they get their substantial earnings again. Anyway, they go back and forth every other year between in and out. And that can be very appropriate for someone who's right on the edge of earning through their WEP penalty. And they're close to the end of retirement and they have a substantial pension. So therefore their full WEP penalty would be hit. But it's tricky because like, in my case with that gal that I was working. She really didn't have that big of a pension. She should be out because it doesn't really help her a whole lot to opt in and out because the substantial earnings are irrelevant because it's just gonna be half of her pension anyway. And something to be aware of. If you are gonna opt out, you wanna put that money in a good place. You're just opting out and not saving that extra money that you would've paid into Social Security. You're not really getting that benefit so you can opt out and that can be a great strategy. Just make sure you're putting that money into a good place because you are gonna have that penalty and you're gonna have to make up for it somehow. You would do [00:20:00] better on your own most likely at 6.2% of your earnings that you're paying in FICA taxes for Social Security. So if you have the ability to opt out and your employers may be giving you 3.1 and you are putting another 6.2, I would take 9.3% savings, you know, into an account and count on myself to do better than Social Security, paying me whatever they're going to pay me in the future. The rate of return on your Social Security tax versus the payment you get. In retirement really? Isn't that great, but you're forced into it. So you might as well get it. And I always say though, you run the numbers and I always say the numbers don't go to bed with you though. right. That's what it's no, no, no, no. You gotta hear me out. So the numbers don't go to bed with you. We're listening. Yeah. Laura's like, I'm gonna walk out. no, the reason I say that is because it's the notion that you look at the math and the math may say we should do this. Meaning we'll have more if we save it and we opt out, the reality is, sometimes our personalities and our emotions and what we consider our tolerance for risk starts to play in.
[00:21:00] And so I say they don't go to bed because when you go to bed at night, that's where you stress. So if you're unsure about something, if you're a worrier, You don't like taking on risk. I would really encourage having a strategy that has an ability to opt in and out to be able to try to maximize your Social Security, cuz it's not about having the most money at that point. It's about having the most amount of safety in your plan. I always say that to everybody, cuz I feel like we get to do these benefit fairs where we get to meet with an eclectic group of employees. And you'll have somebody that's 45, you'll have 2 45 year olds come up and you'll explain what we've just explained through this episode. And one of 'em will go, well, obviously you're gonna opt out like, duh, I would do that 10 times outta 10 and the other one comes and you explain it to 'em and they're like, why would anybody not be doing this, opting in and opting now? And so there's a lot of preference on what your personality is like. And so it's kind of one of those things where you gotta know who you are, cuz the numbers don't go to bed with you. I thought you were gonna be. Talking about pillow talk or something that, that the
[00:22:00] spouse convinces you to do something now. I think it's because you, like, what are the numbers or you don't think about numbers or bad news. You just want to not do that. So, if you're taking the numbers to bed, you should do a different strategy. That's a good idea. So I think we've covered GPO pretty broadly. Again, this is something that both weapon GPO, there is a lot of nuance to it. And this particular topic is one we have found to be more personalized to Matt's point a hundred percent than anything else. Well, especially too, if you're entitled to multiple benefits, we've talked about it. Like it can be totally off of preferences if it's just one person, but we've talked about three separate benefits, your own person. Survivor benefits or spousal benefits. In some cases you're gonna have people that are entitled to all three. And if you're entitled to all three, it starts to become kind of a tightrope of what do you do? What's the way we can maximize it? I'm gonna put Zacc on the spot talking about an example here, you had a client you were working with that had a GPO penalty. Do you remember the one that you are talking about? The pension, the pension and waiting on it? Yeah. Yeah. Okay. That's the one. So the
[00:23:00] rule is technically that you're not subject to GPO until you elect your pension benefit. So he had a pension, but that doesn't trigger the penalty. Having the pension itself, it's having pension benefits paid to you that triggered the penalty. So that was an important distinction for this guy. He was able to take and I'm rewinding the clock a little bit because back in, you know, it's been since 2016, I think you could choose to take a spousal benefit and not your own benefit. And you could delay, it was called a restricted spousal benefit. So his wife filed, he took a spousal benefit off of her record. He got the full half because GPO didn't affect the spousal benefit at that time. So he got the full half and waited until he was 70 years old. At which time he switched to his own benefit and he could file for his pension at that time. Now, keep in mind, the GPO affects the sorry, the spousal benefit. And so he didn't experience the GPO.
[00:24:00] And when he switches to his own, he doesn't experience the GPO on his own either because a GPO has nothing to do with his own benefit. It's a web that applies there, but he had enough substantial earnings that the web didn't apply to his own. So it was a strategy where he could. Actually avoid the penalty on both sides. The spousal benefits the GPO on the spousal. He avoided it because he hadn't elected his pension yet and switched over to his own. Alexis pension has substantial earnings and avoids the web as well. And that was one where I wish we could do that for everyone where you have these ways of working around it. That was just a really fortunate situation where he was able to avoid both penalties and get benefits. Some of those strategies are taken away, but the point is you at least have to look at it and understand what applies to what benefit. And see if there's an option to try to work through that. And it translates to thousands of dollars, thousands of dollars. You talk about like the average Social Security benefits, probably what between 14 and 1600 is what I'd anticipate. So if we just said 16, hundred's the average, that means in this example, that Zacc was talking about that spouse was able to
[00:25:00] collect $800 a month. They otherwise wouldn't have. For four years, for four years. Yeah. And then jump on another benefit. So that's money that the Social Security board's not gonna call you and be like, Hey, Hey Dave, we've run into this. Stewart had this problem. Let's get you some money. I love it. There's no Dave or Stuarts that we work with. Not a single one. Those are, yeah, those are. Fictional characters. okay. What, what were you gonna say, Laura? Oh, I was just gonna say basically the moral of the story is there are lots of strategies that you can use, especially if you have this option of opting in and opting out and it can make a big difference when you're young of what you decide. So this is one of the Social Security things that you should be aware of. Even when you're young, because what you decide now can make a big impact on what's gonna happen in the future. You're saying like, if you worked for an employer that allowed you to not pay into Social Security and you truly did save all that money over a decade or two or three, that could make a major impact on your overall plan. Yeah, for sure. Which is why I think a lot of employers actually choose to opt out as they know the math works out to the
[00:26:00] employee's favor. Well, that's WEP, GPO, weird topic, weird penalties. But, um, but basically it's important to understand it. If it's applicable to you, if there's any chance you're gonna be opting out of Social Security. Thanks for joining. We have next, when should you file? And this is more, this is really bringing all of the strategies together. We did talk a little bit about strategy today. Um, regarding the penalties, but now we're going to give you two or three or four examples of how survivor benefits, spousal strategy, divorce, calculating the benefits the right way, like how all of that comes together and how you do break even analysis to determine how old you need to live to make it to, to make up the money you missed. And there's a lot in it. Um, this is where it all comes together and then we'll move on to investing after that. Thanks everybody. Awesome. Thanks. This podcast is intended for informational purposes only and is not a substitute for personal advice from Capita.
[00:27:00] This is not a recommendation offer or solicitation to buy or sell any security. Past performance is not indicative. Or for future results, there can be no assurance that investment objectives will be achieved. Different types of investments involve varying degrees of risk, including the loss of money invested. Therefore, It should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. Further. Capita does not provide legal advice. Tax advice, please consult with your legal or tax professional for advice prior to implementing
[00:28:00] any strategies discussed during this podcast, certain of the information discussed during this podcast. Is based upon forward looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Capita believes that such statements, information and opinions are based upon reasonable estimates, eight and assumptions. However, Forward looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward looking statements. Therefore UND undo reliance should not be placed on such forward looking statements, [00:29:00] information and opinions, opinions. Registration with the SEC does not imply a certain level of skill or training.
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