No Safety Net

By Joshua B. Gottfried
April 1, 2006

Although personal IRAs and company-sponsored 401(k) and pension plans may provide much of a retiree's income, Social Security remains the touchstone for retirement planning for many employees. On the healthcare front, it's Medicare.

But not all employees are covered by these twin government-benefits programs. According to the National Council on Teacher Retirement (NCTR), roughly 4 million state and local government employees are not covered by Social Security. That number includes teachers and other public employees in 14 states: Alaska, California, Connecticut, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio and certain local governments in Georgia, Rhode Island and Texas.

These employees are known as public employees not covered under Social Security (PENCSS). If you have clients who are retired public school teachers or public employees in one of these states, they may not receive most of the Social Security income they were expecting, forcing you to devise other income solutions for them.

For any adviser working with PENCSS clients, it is important to understand Social Security's offsets on expected income in retirement. Working as closely as we do with Connecticut's Teacher Retirement system, we see a huge amount of misinformation among teachers and their advisers about Social Security and Medicare.


Social Security has two provisions that affect retirees who receive government pension income from an employer who did not pay Social Security taxes: the government pension offset (GPO) and the windfall elimination provision (WEP).

GPO. Started in 1977, the GPO applies to all retirees whose spouses are eligible for Social Security. For most Americans, Social Security pays a monthly income to spouses who did not earn 40 credits themselves, but are married to someone who did. In contrast, the GPO decreases spousal and widow(er) Social Security income according to a formula based on the PENCSS' pension. If two-thirds of the PENCSS' pension is greater than the spouse's Social Security income, Social Security will not pay any spousal benefit to the PENCSS. This is true of both living and survivor benefits.

For example, assume a PENCSS client's spousal Social Security benefit is $700 per month. The client also receives a pension of $1,800 per month. Because two-thirds of this amount is $1,200, which is greater than $700, this client will receive no Social Security spousal income. In most cases, we have found that public employees' pensions exceed the two-thirds limit, preventing them from receiving any spousal income benefits or widow(er) benefits from Social Security.

WEP. In our practice, we see many teachers who have 40 Social Security credits from odd jobs over the years. If the public employee has 40 credits from summer jobs or part-time jobs that paid into Social Security, at age 62 that retiree will be eligible for Social Security. But WEP impacts this Social Security income.

Social Security benefits are based on the average monthly Social Security earnings of a worker. It is a three-tiered system that multiplies the first tier of earnings (currently about $627) by 90%, the second ($3,157) by 32% and anything above that by 15%. WEP decreases the multiple on the first tier from 90% to 40%.

For example, assume a PENCSS client earns $1,000 monthly from a second job. The client's expected Social Security would be $683.66, but after WEP, the actual benefit would be $370.16.

There is one circumstance in which WEP does not apply. If a retiree has worked for at least 30 years in a job covered by Social Security and has made substantial Social Security earnings in each of those years ($16,275 is the threshold in 2006), his or her Social Security will not be reduced by WEP. We rarely see clients who have had a second job for the past 30 years that meets this requirement, however. The rule of thumb is that most retirees will receive only 40% to 50% of the Social Security income quoted on their annual Social Security statement. Social Security has online calculators that help clients and advisers understand these offsets. The GPO calculator can be found at and the WEP calculator at /retire2/anypiawepjs04.htm.

The two offsets begin only when a PENCSS client's pension starts. Employees who have not retired and are over Social Security's normal retirement age (currently 65 and eight months) are eligible to receive Social Security spousal or survivor retirement benefits until they retire. We have a client who is 68 and receives Social Security widow benefits. She tells us that she continues to work because retiring would cost her $14,000 per year. As soon as she retires and receives a pension from the state, she'll forfeit the income from her deceased husband's Social Security benefits.

The two offsets change pension income planning for advisers. You cannot assume that clients will receive survivorship Social Security or even the full amount shown on the annual statement. According to the agency's most recent monthly statistics from December 2005, the average Social Security survivor benefit was $949.80 per month. The average spousal Social Security payment was $499.40 per month. For clients who are affected by the GPO, that is income that will never be received. As advisers, you have to find a way to replace it.


Many public employees who do not pay Social Security taxes do not pay Medicare taxes, either. If public employees have earned 40 credits for Social Security, they are entitled to Medicare at age 65. If they don't have enough credits themselves, but their spouse is eligible for Medicare, then they, too, are eligible at 65, assuming the spouse is at least 62. If they are single, married to someone quite a bit younger or neither spouse paid into Medicare, the couple may not be eligible for Medicare at age 65.

In Connecticut, public school employees may purchase medical insurance from their last employing board of education. The cost is usually $300 to $500 per person per month. And that's after the state subsidy--hardly the great benefits most of us assume public employees receive.

One way to reduce this monthly cost is by using Medicare Parts A & B once the retiree reaches 65. If the retiree is Medicare-eligible, Medicare Part A is free. If the retiree is ineligible, Medicare Part A costs $393 per month for a retiree with less than 30 credits and $216 per month for retirees with 30 to 39 credits. Medicare eligibility saves the retiree $4,700 annually.

In 2006, earning four credits toward Medicare and Social Security requires only $3,880 of Social Security earnings. Working five to 10 hours per week at the local garden shop or hardware store would easily satisfy this. Also, by earning the credits, the PENCSS would become eligible for WEP-reduced Social Security. It's not a huge amount, but after a year of part-time work, with enough quarters to receive Social Security income, the client could conservatively expect an additional $100 per month and free Medicare Part A.


Although teachers' groups are lobbying to change the law, the numbers are against them. The National Education Association has reintroduced legislation to repeal both the GPO and WEP. But, according to the Congressional Budget Office, repealing the GPO alone would cost Social Security $1.1 billion per year. According to the NCTR, if local governments were to begin to pay into Social Security, it would cost the governments and employees each $8 billion annually. Given the long-term structural problems Social Security faces, it seems highly unlikely that the agency will be able to increase the benefits of PENCSS employees.

Thoroughly understanding these offsets and the attendant Medicare issues enables advisers to offer more accurate advice on survivorship and income planning throughout retirement. With so much misinformation on the effects of Social Security rules on public employees, your PENCSS clients will likely receive bad advice at some point during their career. Clear up their misconceptions and help them plan for a stable retirement.

Joshua B. Gottfried is an adviser at Levine Gottfried & Somberg and Teacher Retirement Planning Services and an investment adviser with Commonwealth Financial Network, member NASD. He specializes in helping Connecticut teachers plan for their retirement. He can be reached at (860) 430-9104 or at

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