On January 5, 2025, as one of his last acts before leaving office, President Biden signed into law the Social Security Fairness Act of 2023. By eliminating certain provisions that applied to some federal and state employees, the law will increase Social Security benefits for nearly 3 million current and former public employees. This Act affects a majority of Texas K-12 public school teachers, who paid into the TRS pension plan, for the better.
How It Works
The Social Security Fairness Act dissolves the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), both of which previously placed limits on the Social Security benefits payable to certain public employees or their spouses. The WEP was signed into law in 1983, effectively reducing Social Security benefits for persons receiving a pension that was not covered by Social Security payroll taxes (applicable to many public school teachers, firefighters, police officers, and others). Depending on earnings and the age at which they claimed their benefits, the monthly Social Security income benefit for these persons was subject to reduction by up to 50% of their non-covered pension benefit. Similarly, GPO was signed into law in 1977, designed to reduce Social Security spousal and widower benefits if the beneficiary received a pension that was not covered by Social Security payroll taxes. Their Social Security benefit could be reduced by 67% of their non-covered pension. For example, if someone was receiving a non-covered pension of $1,000 per month, their spousal or widower benefit from Social Security could be reduced by $670 per month. So, if a person was entitled to a $800 Social Security spousal or widower benefit, their amount could be reduced to $130 per month, because of the GPO’s effect on the non-covered pension. Often times, we’ve seen spousal Social Security benefits be totally eliminated by the GPO for Texas K-12 school teachers, so this new Act is very welcomed!
The Congressional Research Service estimated that as of December 2023, 2.1 million Social Security beneficiaries (3% of all beneficiaries) were subject to the WEP and 745,769 beneficiaries (1% of all beneficiaries) were subject to the GPO. Public employees from Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio were not previously covered by Social Security. Likewise, in Arizona, Arkansas, New Mexico, Utah, and Wisconsin, some public employees may not have been covered by Social Security.
The changes introduced by the Social Security Fairness Act of 2023 are retroactively effective for Social Security benefits otherwise payable after December 2023. Current recipients do not need to take any action, but they should verify with Social Security if their current mailing address and direct deposit information are correct if it has recently changed.
What about Long-Term Effects?
It is no secret that the long-term viability of Social Security has been under discussion for quite some time. According to the Social Security Trustees’ Report released in May 2024, the Social Security Trust fund is projected to be exhausted by November 2033, which would lead to an automatic reduction in benefits by 21% if Congress and the president do not act. Because the passage of the Social Security Fairness Act mandates a higher level of payouts to beneficiaries, the Congressional Budget Office (CBO) projects this will accelerate the insolvency of the trust fund by about 6 months and will cost around $196 billion over the next decade.
in other words, though the Social Security Fairness Act means a “raise” for many retirees, this new law comes with a cost. It remains to be seen what actions Congress and the president will take to bolster the future solvency of the Social Security Trust fund. Given the number of Americans (and voters) who depend on Social Security for a significant portion of their retirement income, it seems somewhat likely that elected officials will be motivated to enact solutions. Social Security is such a large program that small changes can have long term, positive effects on its solvency. Of course, predicting what the federal government will do about any given issue is no easier now than it was in the past.
Nevertheless, because the Social Security Fairness Act can secure more income for current and future public employee retirees, these changes could alter the basic assumptions for retirees’ financial plans, thus presenting new planning opportunities. To learn more, especially about specific implications for your retirement planning, please meet with your Gruden advisor to update your financial plan if you believe this law affects you. And if you have questions or concerns about any other important financial matter, please contact us: we are here to help.
