By Mark Wallace
Years ago, the cities for which I worked made changes in their retirement programs from a defined benefit system to a defined contribution system. Often, this was a state-managed, public-employee retirement system. Sometimes, as it was in my case, we (collectively, after a vote by the affected employees) selected a “self-directed IRA” (401K-type) system. In the best cases, the employers matched the employee’s contribution. Many jurisdictions also offer a deferred compensation plan (457 plan) as well.
This article is not about those decisions; it’s about the Social Security system. What sometimes happens, as it did in my case, is that “we” opted out of paying into the Social Security system to get a higher contribution into our local pension system.
We know that Social Security is a tax system based on your salary. If your employer and the employee don’t pay into Social Security or you work for part of your career in a different country, the Social Security Administration (SSA) program, called the “Windfall Elimination Provision,” will affect how much your Social Security retirement or disability pension payments when, if you apply for Social Security benefits when you retire. Early in my career, this didn’t seem to matter as much as the numbers on my monthly paycheck. A group of us, including myself, have paid into Social Security for enough years to qualify for a Social Security retirement benefit. BUT, a portion of the fire departments that employed me did not pay into Social Security. Therefore, the “Windfall Elimination Provision” may apply to many of us.
Before you get too excited about this provision, get the Social Security facts about your specific account. Go to www.ssa.gov and sign up for an online account to “My Social Security.” Once you have signed up, you can get your up-to-date Social Security statement by simply signing in on the site and following the instructions to download and print your personal statement. “Your Social Security Statement” provides personalized information to help you plan your retirement future.
I recommend that you carefully review your earning records listed on your statement. If there seems to be a problem, the statement gives you information on how to ensure that your earning records are accurate. It also will provide you with an estimate of your retirement earnings if you start taking them at age 62, at full retirement age, or at age 70. Monthly benefits have significant differences depending on your age when you first apply for benefits. The SSA has pretty good information about when you should start receiving benefits. Obviously, the longer you wait, the higher your SSA monthly checks will be.
It’s a personal decision. How long are you going to live? Obviously, you want to maximize your retirement checks, but that is balanced by how long you want to or even can effective stay on the job. You can run some comparison numbers by calculating your total payments based on living to a specific age, such as 90. If you start receiving SSA retirement checks at age 62, simply multiply your monthly amount by the number of months until you reach age 90. Do this for 62, full retirement, and age 70. You will see that the total funds received from Social Security will be significantly higher the longer you wait to begin receiving Social Security retirement benefits. Using only your specific circumstances can help you decide when to apply. It’s up to you to understand the different totals.
You can get a month-by-month estimation from your local Social Security office or online (by searching for it) a list of your estimated benefits for each month from age 62 up to age 70. It’s basically 100 percent at full retirement age and 130 percent of your full retirement amount at age 70. You have to start receiving benefits at age 70. At 62, your amount is basically 25 percent less than you would receive at full retirement age. Additional resources are available at www.socialsecurity.gov/planners and www.socialsecurity.gov/estimator.)
The Windfall Elimination Provision will apply to you when you reach age 62 after 1985 or if you became disabled after 1985 AND you first become eligible for a monthly pension on work that did not pay into the Social Security system (SSA taxes) after 1985, even if you are still working. The SSA Web site has more information and a chart on the Web site or you can search for “Windfall Elimination Provision”. It’s a fairly complicated calculation, but the Web site helps walk you through the process. The explanation form states that there are exceptions to the various calculations; you can consult the site for more details on this.
If you are qualified to receive Social Security retirement benefits, but you have less than 30 years of “substantial” earning in a job where you paid Social Security taxes, you will have a reduction in your estimated Social Security retirement benefits when you retire and apply for a monthly Social Security retirement check because of the Windfall Elimination Provisions. Although the current table lists the maximum monthly reduction could be as much as $413, there is a note that states “The maximum amount may be overstated.” The amount of the reduction is based on the numbers of years you had “substantial earnings” that were taxed by Social Security and the year you apply for SSA retirement benefits.
In many cases, shift firefighters work an off-duty job that may have paid into the Social Security System and that income would be reflected on you personalized statement. If that is the case, you could reach the 30 years of substantial earnings threshold and not be subject to the Windfall Elimination Provision. If that is not your case, this article may help you eliminate surprises as you plan for retirement.
Mark Wallace (MPA, EFO, CFO, FIFireE) is the author of Fire Department Strategic Planning: Creating Future Excellence. He is the former State Fire Marshal of Oregon and a former chief in Colorado and Texas. He currently operates Fireeagle Consulting (www.fireeagleconsulting.com). He wrote the planning chapter in the 7th edition Fire Chief’s Handbook, which was released in fall 2014.
