Today, the Senate passed the Social Security Fairness Act of 2023 with a 76-20 vote. This significant relief for more than 3 million Social Security pensioners is among the final measures anticipated to be enacted by President Biden before his presidency concludes.
This legislation represents a crucial advancement in reforming the Social Security system. It seeks to correct benefit disparities and promote a fairer allocation of resources for retirees and disabled individuals. Fundamentally, it reinstates Social Security benefits for those who have contributed to the system, ensuring justice for those who have also invested in other pension plans that are not subject to Social Security withholding taxes.
Key Provisions of the Social Security Fairness Act
Elimination of the Windfall Elimination Provision (WEP): The act seeks to repeal the WEP, which currently reduces Social Security benefits for individuals who have worked in both the public and private sectors.
Modification of the Government Pension Offset (GPO): The legislation proposes to repeal the GPO, which affects spousal benefits for those who receive a government pension.
Increased Transparency: The act includes measures to improve transparency in how benefits are calculated and distributed.
Support for Vulnerable Populations: Additional provisions aim to enhance support for low-income retirees and individuals with disabilities.
It's about time!
When planning for clients with cross-border issues, we often assess the impact of the Windfall Elimination Provision. This provision can reduce a person's Social Security benefits due to contributions to a 'non-covered pension'. The Canada Pension Plan is considered one of these non-covered pensions, making the evaluation of Social Security benefit reductions a key part of our planning process.
The Windfall Elimination Provision was introduced in 1983 to eliminate an unintended 'advantage' for those receiving benefits from both Social Security and other employment pensions that did not require contributions to Social Security. The Social Security benefits for these individuals are calculated based only on the quarters they contributed to the system.
Impact of WEP and GPO on Social Security Benefits
Research indicates that about 4%, equating to 2.8 million individuals, of all Social Security recipients have had their benefits impacted by WEP, GPO, or both. This group includes employees from state, county, municipal, and special districts across 26 states.
By December 2023, more than 100,000 people outside the United States have been impacted by WEP, 14,000 by GPO, and 4,000 by both.
In 2024, the WEP reduced the share of the first $1,174 of AIME (average indexed monthly earnings) by up to 60%, depending on the number of quarters that a pensioner had contributed to Social Security. This adjustment had a maximum reduction of $587 per month.
This will inject fairness back into the system, but does not address the medium to long term issues with the funding of Social Security benefits.
How quickly this change will apply to existing pensioners is still unclear, assuming it is signed into law.
The future of Social Security is still unclear
The latest research coming out of the Social Security Administration (SSA) shows that cuts will be required to benefits paid by up to 24% as of 2037.
This is, in large part, due to changing demographics. As Social Security is a 'pay-as-you-go' pension system, there will be fewer individuals paying into the system to support the number of pensioners receiving benefits.
There is now pressure in Congress to make changes to the system—whether it be increased payroll taxes or a reduction in anticipated benefits.
Combined OASI and DI Trust Fund assets as a percentage of program cost, 1990–2008, projected under alternative assumptions, 2009–2085*
NOTES: Alternative I = low-cost assumptions; alternative II = intermediate assumptions; alternative III = high-cost assumptions.
What does this mean for our clients?
We can simplify our cross-border planning by eliminating the need to consider WEP for clients expecting to receive Social Security benefits.
As well, we are factoring in a reduction in anticipated Social Security benefits with the assumption that nothing will be implemented in Congress in the interim.
References:
*Future of Social Security: https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html#:~:text=As%20a%20result%20of%20changes,are%20projected%20to%20become%20exhausted
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