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MASON & ASSOCIATES, LLC

FEFP: Social Security: What Proposed Changes Mean for Federal Employees (EP81)

December 23, 2024

Are you curious about the future of Social Security? With proposed changes to taxation and potential expansion of who is eligible for benefits, it's more important than ever to understand how these changes could impact your retirement.

In this episode, John, Tommy, and Ben, explain the complexities of Social Security, as well as year-end reflections. You'll learn about the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), as well as how they can currently significantly reduce your Social Security benefits. You'll also discover the potential impact of making Social Security benefits tax-free, how it could affect your overall retirement income, and the importance and value of having an adaptable plan in place.

Listen to the full episode here:

What you will learn:

  • Why we talk so much about Social Security—and why it's so important to understand when it comes to retirement. (9:25) 
  • How Social Security is currently taxed. (11:11) 
  • Who would be impacted by the proposals to make Social Security income tax-free. (14:30) 
  • How these proposed changes could potentially impact the way we do financial planning. (20:15)
  • An example of how tax-free Social Security benefits could look. (29:40) 
  • What the Windfall Elimination Provision is and who it impacts. (33:40) 
  • How Social Security began—and why the system has always been broken. (41:34) 
  • Defining the Government Pension Offset (GPO) and potential changes coming there. (43:00) 
  • Why it's so important to have a financial plan in place. (52:16) 

 

Ideas worth sharing:

  • “Working with a financial advisor is not just about the money; it's about peace of mind and knowing that you're on the right track.” - Mason & Associates
     
  • “We are not promised anything in this world. We're not promised how much time we have with our loved ones, how much time we have on this planet, and at the end of the day, how much time we have our cognitive abilities. I know for sure that there are many capable people who have hired us because they've recognized that their spouse is going to need us if they die first.” - Mason & Associates
     
  • “This was day one of Social Security. The system was broken and flawed. Since it was created, life expectancy has gone up. People are living longer, and what was originally designed as welfare to protect our Old-Age, Survivors, and Disability Insurance (OASDI) has morphed into a retirement planning tool. And what we're doing now is we're getting further and further from the intent of the original system, which was OASDI, and now we're talking about making Social Security tax-free for the wealthy. I think it's just further and further from the original intent of the program.” - Mason & Associates

 

Resources from this episode:

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Read the Transcript Below:

Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.

John Mason: Welcome to the Federal Employee Financial Planning Podcast. I'm John Mason, Certified Financial Planner and President at Mason & Associates. With me today on this episode, we have Tommy Blackburn and Ben Raikes, who you're very familiar with now, but we've got CFPs, CPAs, EAs, Personal Financial Specialists, and probably more credentials than I'm even missing.

And what's unique about this podcast, and specifically Federal Employee Financial Planning, is you're getting three people who actually do financial planning every day. You're getting three people who are partners at a real financial planning firm that actually serves clients every single day.

So you're getting the perspective of real financial planners. You're getting people who are partners and owners in a firm. We're financial planners first. We do this second. And as always, thank you for being a part of another episode of the Federal Employee Financial Planning Podcast. So today we are going to be talking a little bit in general.

So a lot of the things that we talk about on this podcast are like, “How does federal employee health benefits work? How does Social Security work?” In this episode, we're not going to pontificate. We're not going to guess at what happens, but there are things that are happening in the news that could directly impact you, your retirement, your friends, your colleagues, your spouse—a surviving spouse.

There's so much happening. Nothing has been signed into law yet, but there are three or four things happening with Social Security right now. They could reverberate throughout the country, guys. And we want to talk about those today and talk about the impacts, not whether we agree or disagree with what potentially could happen, but like the planning considerations around the what if, and hopefully this gets through to our audience, the value of having a financial planner, understanding that you have somebody who can go to bat for you and fight these battles, if you will.

So I think we have a lot of ground to cover. Welcome, thank you for being on this episode with me, and I hope you guys are having a good morning so far.

Tommy Blackburn: Having a great morning. I don't know about y'all, as we just think about this time of year, we're approaching the end of the year, Thanksgiving's coming up around the time that we're recording this, and it's always a busy time for the firm as we close out the year, and make sure we put the finishing touches on the annual tax moves, or financial planning moves for our clients, and then also just the fun with the balancing the holidays.

It's busy. There’s a lot of balls in the air, a lot to get done. We're putting our Christmas lights up the other day, as well as got the tree. We've still got a little bit more decorating to do, and amidst all this, I also had a birthday, guys, so it's been busy.

Ben Raikes: Happy birthday, Tommy.

Tommy Blackburn: Thank you, sir.

Ben Raikes: Yeah, I have to agree. Guys, life is hitting me really fast right now. So as Tommy said, we've got Thanksgiving in a couple days as of this recording, and then I go to West Virginia for my grandma's famous cookie party the week after that. Then I've got Christmas when we'll be in San Francisco, and we'll also be in Bridgeport, West Virginia.

And then on top of that, we're due to have our very first baby girl in February, and so I feel like I'm just going to snap my fingers, and February is going to be here, and we are just. It feels like life's coming at me really fast right now, guys.

Tommy Blackburn: And not going to slow down for you.

Ben Raikes: Yeah, it's not slowing down.

John Mason: Yeah, you think it's fast now, wait until you only sleep three hours, and then tell me what that's all about. It's certainly going to be life-changing and then. You think it's hard now planning whose family you're going to see on any given holiday.

Just wait till there's a grandbaby involved and everybody's—they don't care whether or not you show up. They care whether or not the grandbaby shows up.

Tommy Blackburn: And they don't really care about how inconvenienced you are either.

John Mason: I'm sorry, I missed your birthday.

Tommy Blackburn: That's all right man. No worries, and our birthdays are close together. So you just celebrated one as well.

John Mason: That's right. Yeah, we're officially late 30s. So Ben's the young buck here. Are you still early 30s, Ben?

Ben Raikes: Yeah, does 34 count? Does 34 count?

Tommy Blackburn: You got one coming up. Does that put—?

Ben Raikes: Yeah, I'm gonna be 35 in January. So might as well just say mid-30s is already here. I hate saying it. But you guys are what, 37?

Tommy Blackburn: Yep. We're approaching the other milestone.

Ben Raikes: Old bucks. Okay. Lots going on.

John Mason: So we graduated Virginia Tech in 2010, and this is 2024, so we're coming up on our 15-year, Virginia Tech, I even got an email about some reunion.

Tommy Blackburn: That's cool. We both got it.

John Mason: And I was like, I'm probably not going to help with that.

Tommy Blackburn: Me too. I had the exact same thought. I was like, I wonder if John got this and is thinking I'm going to help with this. I was like, I don't really think so.

John Mason: As we think about diving in, guys, into the podcast episode today, I started journaling recently to get my thoughts out and just down on paper once or twice a day.

And I was doing Christmas over the weekend, Tommy, and I wrote in my journal something along the lines of today is supposed to be a happy day. And like Christmas decorations and going to the storage unit and lights that don't work and things like that. And I wrote down, “Be patient, today's a happy day,” and all these kinds of things.

And it was like, historically, this has not been one of my favorite days. But it really helped put it into perspective for me that it was like, I need to reflect on the fact that this is supposed to be a special day. And so the journal's helping, whether it's personal life or client things that are going on.

It's just been a nice way for me to vent privately in a safe space.

Tommy Blackburn: Collect your thoughts. Yeah, it sounds like a good practice. One that I should probably consider. So maybe that's, yeah, even for our audience, if it's not something they do, something to consider. Maybe there are other methods out there for you, but I think you're right because I have caught myself at times being like, you need to just take a step back and try to enjoy the moment and the chaos that's going on around you.

Like this is all part of it. Don't get overwhelmed by everything that's coming at you right now.

John Mason: And what I've noticed, I don't know if you guys ever write in cursive or if our audience ever writes in cursive, I think kids in high school today, can barely sign their name.

I'm sounding like an old, grumpy old man, from that, that there was that movie Grumpy Old Men, but it's I actually, in my journal, I write either with a pencil or a pen, typical utensil, but I like pencil better because I feel like my cursive handwriting is better. And there's something about having to use your mind and think about making the letters.

And I feel like. I watched the Patriot the other day. Sorry, audience, for this tangent. And General Cornwallis lost his notes in his journal. And he was very upset about that. So when I write in pencil, or I write in pen and I'm doing it in cursive, I feel like I've been like, I've gone back in time almost, and I'm reading my journal and reading my handwriting, and it just feels like a different experience than if I was just printing it. I don't know why.

Tommy Blackburn: I can see that. Yeah, who knows? Memories also are connected with the muscle movements in your hand doing that. So it was yeah, I can certainly imagine it. So as we talk about being overwhelmed and trying to reflect and plan and think, guess that brings us into light in the news at least politically right now. And I think today's episode we wanted to focus on Social Security, some of that news we're and we'll try to break up the different things in the news or some different potential happenings in different episodes.

And I think back guys that I think it was episode 41 where we said, Social Security in the news and I'm confused. And I know we're not gonna spend too much time saying our thoughts or pontificating on all of this news, but I certainly am still confused as some of this news comes out. And also just wanted to shout out Episode 11 and 12 is where we previously… We've talked about Social Security a number of episodes, but 11 and 12, we talked about WEP and GPO, which I think we want to spend a little bit of specific time on today.

And that we also had a mini-series, it looks like between Episode 35 and 38, where we dove into a lot of Social Security parts. So just sharing with the audience, if you want, go back to those episodes where we've covered a lot of this in different detail than maybe what we'll cover today.

John Mason: It's a great point, Tommy, and as you're saying that, I'm like, I can't believe we've talked so much about Social Security in the three years that this podcast has been in existence, but at the end of the day, it's a third of your retirement, or it's part of the three-legged stool if you're under FERS, if you have a $30,000 or $40,000 Social Security, which many people do that's a gigantic benefit.

Maybe it can seem like we talk about it a lot on this podcast, but it's a significant part of a federal employee retirement. It's even more significant of private sector. You could do your friends a solid and share these Social Security planning episodes with them too. And we can also call out the one that we did with Elaine Floyd.

Tommy Blackburn: I was just thinking there's another one. Yeah. Episode 73.

John Mason: 73 was great because we have a Social Security planning expert. Let's start guys with talking about how Social Security is taxed. Then we'll dive into Windfall Elimination Provision, and then finally GPO. So there's news, right? And I think both presidential candidates, Kamala Harris and President Trump, both mentioned that they wanted to make Social Security retirement benefits tax-free for retirees.

And I would have to assume that would also extend to other benefits for folks who maybe are receiving disability benefits and their spouse is still working. So you'd have to think it would reverberate throughout the system in many ways, so not just retirement, but other benefits as well.

Ben, share with me, or share with the audience, how is Social Security taxed now? And does everybody pay tax on Social Security? What does the current system look like?

Ben Raikes: If I'm speaking directly to our clients right now, and I think that will be the easiest place to start, is that essentially, Social Security is taxed up to 85% of the benefit, so that doesn't mean that Social Security is taxed at 85%.

That means that if you had $10,000 of Social Security income, what you write on the taxable line on your tax return is $8,500. The way that we come up with that number is essentially if you have income that is not Social Security income. If you have interest, if you have pension income, if you have IRA distributions, what we would call the other bad income over a certain amount, and John and Tommy, you probably know what that certain amount is, then that's where up to 85% of that benefit is taxable.

On the other side, if the only income that you ever have is Social Security, more likely than not, in 99.99% of cases, your Social Security is completely tax-free. Based on your income, you'll be somewhere between 0% and 85%, but for most of our federal employees, 85% of their benefit is going to be taxable because they do have those IRA distributions.

They do have those first pensions that bumps them over that limit. Guys anything important that was missed there?

John Mason: I think you did a great job, Ben, kinda highlighting it. When we used to do more public speaking, we coined the 85/15 rule, which I think is still accurate, and it's a maximum of 85, was it 85/15?

I'll have to come back to it. It was 85 something, and it was like 85% is the maximum amount of your Social Security that could ever be taxed. And then the majority of the states in the United States do not tax Social Security either. I think it was the 85/37 rule. So it was 37 states, including Washington, D.C., don't tax Social Security.

And a maximum of 85% could be taxable. The standard formula is called provisional income. So there's good money that doesn't impact your provisional income. And then there's bad money that does impact your provisional income. So you did a good job, Ben highlighting the bad money that does increase your provisional income.

Things like municipal bonds get added back to determine whether or not your Social Security is taxable. The majority of folks like if you're only income is Social Security, and we could say both of you make $40,000 a year in retirement.

John and Sarah are married. I make 40k. She makes 40k in retirement. We pay 0 Virginia tax and 0 federal. We may have some provisional income that flows over to the tax return, but our standard deduction’s almost $30,000. So I'd have to have over $30,000 of Social Security actually flowing through to the tax return before my standard deduction doesn't eat all that up.

So I think you could even go higher into the $120,000 or $130,000 of Social Security before we ever incur a tax bill. And that's not physically possible right now.

Tommy Blackburn: And I think, yeah, that's awesome, John. Great way of explaining it. I think maybe what we're also trying to illustrate here is that many people in the current—many retirees, their only income is Social Security.

I don't know the exact number, but I believe that's just pretty much a known fact that most retirees in this country, their only income is Social Security. So most retirees are not paying federal income tax, and they probably are not paying state income tax. So we just shared this one to illustrate how the taxation of it works, but also just put a little bit of a light on from much of the country, Social Security is not taxed. So when we now are talking about these proposals to make Social Security income tax-free. We're talking about maybe the minority of retirees that this would affect.

And we are talking about as you both just went through retirees with other income sources, which does tend to be our clientele because they have a pension. But it's not the retirees where all they depend on is Social Security. We're talking about retirees with other resources hitting their tax return.

Those are the folks who could be affected by no longer paying taxes on their Social Security. I will say too, we'll gloss over this. I don't think we want to go too far down the tax torpedo route, but it can be rather insidious as you begin paying taxes on your Social Security. There's a range and we have a nice illustration when we work with clients and we want to explain it.

This range calc that shows you, you could be in, say, the 12% tax bracket, but if Social Security is now being pulled in because your other income sources are making it taxable, you're at maybe actually at 24% tax rate because for every new dollar of, say, pension income that's coming in, a dollar of Social Security is following it too at that 12%.

So it can be a nasty range as you're working through it. For many people, though, we move through it pretty quickly and we're back to the normal tax system, but it's some complications, some nuances and some things to be aware of why it's always helpful to have experts in your corner helping you with your situation.

Ben Raikes: I think the other thing, Tommy, that you pointed out there that I think is important, especially for our audience to know, is what you said. We probably have the majority of retirees that exist in the United States, that Social Security is their only income. And when we're talking to you, when we're talking to our federal employees, I think it's important to realize you all are in the minority with that pension income.

The vast majority of retirees across the United States, whether they're government or non-government employees, do not have pensions. And so your situation is just always a little bit different. Tommy mentioned the tax torpedo and how we can play with the income numbers to make sure that we stay out of that tax torpedo and just make sure that because you are different, you're working with someone that knows exactly, hey, maybe this Social Security being tax-free, maybe it does or doesn't significantly impact your plan based on the unique situation that you find yourselves in that almost no one is really in across the United States.

John Mason: It's a great point, Ben, and I think summarizing what both of y'all are saying is with the current rules, many people don't even have a 12%. Ordinary income tax bracket right now, because every dollar you pull in from an IRA or pension, $0.85 is coming in on top of that. So your really 12% is 20 or 22, whatever the math comes in, 12 times 1.85.

The 22 becomes could be as high as like the 45% tax bracket, so it does get nasty. If we just call this out, this helps the wealthy, or it helps people that are better off than most. And we're not going to get into this right now, guys, on what is middle class, what is upper middle class.

It's so confusing. Like you could be upper middle class with $100,000 or you can be upper middle class with $500,000 of annual income. So we're not going to define that. We're just going to say, generally speaking, making Social Security tax-free and retirement for everybody is going to help the people that listen to this podcast and the ones that work with financial planners, whatever you call those people, upper class, middle class, upper middle class the uber wealthy, whatever you want to call them, the people that hire financial planners are the ones that are going to benefit from this.

The people that do not hire financial planners or don't have the resources to do, it's going to be status quo. Nothing's changing for them. So it helps those folks and it's certainly what this is going to do, it's going to reverberate throughout the financial planning process for us and our clients because, one, the system you would think would go bankrupt faster.

And I read some quote, I think it was from New Jersey Police officer or a New Jersey somebody like a representative of the law enforcement agency, and they were like, “If it's going broke, anyhow, and some of the changes we make it go broke faster, that's not the end of the world.” So I'm not getting the quote exactly right, but let's acknowledge that if we start giving more benefits, or we start changing the taxation, it's going to reverberate throughout, it’s Social Security solvent.

It's going to result in higher debt. It's going to reduce and lower income to the federal government. And if we don't simultaneously lower expenses, then we're going to increase the deficit, right? So we know that all of that is going to happen. The big thing on how this impacts us, our client family, and the people listening to this podcast is we've been doing Roth conversions and designing tax plans around the tax torpedo and trying to figure out how to minimize taxes over the next 30 or 40 years.

And frankly, if Social Security becomes tax-free, it doesn't mean that there's no planning opportunities for us, but it certainly changes the calculation on things like how valuables are Roth conversion.

Ben Raikes: Absolutely. We say this all the time. We have to work within the rules that we know them as they exist today. And for our entire planning careers, like I said, for most of our clients, we've been planning that up to 85% of that Social Security benefit is going to be taxed for the rest of your lifetime.

So Roth conversions help take out the sting of that qualified charitable distributions, help take out the sting. Donor-advised funds help take out the sting. This is part of the lifetime planning that your advisors have been working with you on. And now with the stroke of a pen, we might have one of our largest assets become completely tax-free.

And so that's absolutely going to change the math. That's going to change the way that we look at all these strategies. And maybe it doesn't mean that we don't do them, but maybe there's less value than there was before. I think that all of that remains to be seen.

John Mason: All of a sudden, we thought we were going to be in the 22% tax bracket in retirement and we're in the 12% or TCJA (Tax Cut Jobs Act) 2017 expires, and we think our clients are going from a 12% to a 15% or a 25% bracket, but oh, by the way, maybe the bracket go up, but our taxes go down because now Social Security is tax-free. And then I'm just thinking this too, like how many millions of Americans, Tommy—we don't know the answer—but how many millions of Americans are paying our favorite Aunt Irma, Medicare Part B, premium tax?

So guess what? Medicare's also broke, and we've got a lot of wealthy people who pay more Medicare premiums than most because of their income. If we chop off 40, 50, 60 thousand dollars of Social Security, guess what we're also not paying? We're either not paying Irma at all, or we're coming down a bracket.

Tommy Blackburn: Yeah, I think maybe what you're—they are crafty with these tax systems, and we have ways of calling things something that is a tax, but saying that it's not a tax. So my suspicion would be like, maybe we do this with somehow we're going to layer in some more on Irma's or it's going to be some way, or maybe, at first, start innocently and say we're doing away with the tax.

And then we go, “Oh no, this is much more expensive than we thought.” So now let's start layering in some of these backdoor taxes that people don't think about off the top of their head. Like Irma, like loss of tax credits some various ones here. So a lot of things can be tied to income and quality and they get crafty.

As I think about it is interesting in that if we did away with it, it seems like on the one hand, it'd make a Roth conversions a little less appealing because we're not worried about the Social Security taxation as much, but it also maybe gives you a bigger window to do those Roth conversions until you get to required minimum distributions because you're no longer planning around that Social Security income.

So it could be fun for us to contemplate, where do we go now if and when this happens? I also wanted to share, so I was trying to look up briefly, and I don't know that this is 100% true what I found, but my mind went somewhere, John, when you said this New Jersey police officer; I was like, I wonder if this is because—you got to wonder where people's motives are, and many of these police systems, maybe not many, but they're out there, don't pay into Social Security.

And so I quickly looked it up and at least what I found was they may or may not pay into Social Security depending on the specific retirement system they're enrolled in. And so if they're in the police and firemen's retirement system, it would appear they don't pay into Social Security.

So it's very easy. When you haven't put anything into it to say do I care if it goes bankrupt in six months?

John Mason: Of course he's looking out for himself. Of course he doesn't care.

Tommy Blackburn: I don't know that this is true, but it just where my mind went for a second. It's maybe you had no skin in the game to begin with.

So all you do is win from here. And some of the confusion again, as we've illustrated, it's a very important system. And so that's where you're just like if this is an important safety net and retirement income system for much of the nation, what are we doing to ensure its longevity or, to alter it so that, just to address it, it seems there's a need here.

We don't know. It seems a little counterintuitive to expand benefits and to no longer tax it, but it's not necessary. It doesn't matter from that perspective, oftentimes we just need to plan with the music that's being played, and that's what we would do for our clients. We just can't help but share sometimes that we're a little confused when we look at some of the issues that are out there and the proposals, but we will dance to the music that's being played, nonetheless.

John Mason: You said sneaky taxes or backdoor taxes, whatever you're saying was. And I think a lot of times retirees get caught up thinking, “I'm just gonna move to Texas because there's no state income tax,” or “I'm gonna move somewhere where there's no state income tax,” but property taxes are like X% higher, maybe 2x, 3x, 4x, 5x higher than what they are in Virginia.

So they didn't charge you based on your income, but that doesn't mean they're not getting it in some other fashion for private sector and in public and federal employees and whatnot, but private sector really is going to change a lot from this. If you make Social Security tax free, it's really going to help people like Mike and Ken Mason because they're like very impacted by the tax torpedo right now.

So it's going to make a big difference for them. It's also going to open up another planning window for harvesting capital gains in a lower tax bracket. So even things like IRA distributions, but also non-qualified accounts. And then it's also going to impact, it could impact AMT if that comes back.

I'm sure it could impact net investment income tax, maybe additional Medicare premiums. Like you start thinking about all the things that—even your ability to contribute to a Roth IRA is limited by your income. So let's say like John and Sarah are married and we're 70 years old.

Sarah's retired. We're both drawn Social Security. I'm still working part-time at Mason & Associates, but you chop off $80,000 of our income. And now all of a sudden, maybe I can make Roth contributions again. And it's you started thinking about all of this. And oh, by the way, if itemized deductions come back, then, and we just reduce income by 60, 70, 80 grand, now all of a sudden our hurdle rates for when medical expenses become deductible and things like everything changes when—

Ben Raikes: All of our floors are reset. Contribution limits are reset. You already mentioned net investment, income tax, child tax credits, American opportunity tax credits.

All of these credits and different deductions that you qualify for are either tied to your taxable income or your modified adjusted gross income.

Tommy Blackburn: You know what they would do, I bet. Maybe they wouldn't do it at first.

Ben Raikes: Look how cynical Tommy is, John. He's like, “They're going to do something.”

Tommy Blackburn: I feel like an easy thing for them to do is we just started going down this route of saying, sure, we're not going to tax Social Security.

But it's just like your municipal interest. You're going to pull it into these calculations. We're still going to count it as income to preclude you from everything else. So who knows? It may take them a little while to catch up to that. But with as much as they do with that already, it's hard to imagine that they wouldn't pretty quickly go ahead and say it's income for everything else that we look at.

We just can't tax it.

John Mason: We're not nearly smart enough to calculate how much this would impact the federal budget over the next 10, 20, 30, 50 years, but I feel bad saying this, but I honestly feel that whatever number they calculated, like making Social Security tax-free, is going to cost $100 billion over 10 years.

I would say that number has got to be wrong. Because I cannot imagine there may be other smart people that came up with those numbers, but I would wager that if they said it's going to cost $100 billion, it's going to cost $200 billion, or maybe even more than that.

And I just don't feel ever, like we know President Trump, Kamala Harris, maybe they're very smart, intelligent people. They don't know the things that we just said. Like point blank, they don't know that stuff. So how this is going to reverberate is mind-boggling.

Guys, we've talked a lot about Social Security tax-free. Do we want to talk more about that? Or do you want to pivot?

Ben Raikes: I just want to go one sidebar real quick just to—we've been talking a lot about it, but I want to say, let's say your average Social Security benefit is $35,000, and you're in the 22% tax bracket. Just for what our federal employees might understand, what does this actually mean for them?

If you're taxed at 22%, that's about $6,500 in tax savings per year, so that's an extra, let's call it $550 a month. So if Social Security becomes tax-free, you're in the 22% bracket and you're pulling $30,000 to $35,000, you're getting another $400 to $500 a month back in your paycheck. And that's the budget problem that we talked about, right?

John and Tommy, it's not just you that's getting an extra $500 a month. It's literally every single person collecting Social Security that also has that bad other income. So it's a great planning opportunity. It's probably a cash flow boost to many of our clients. But it does lead us to scratch our heads just a little bit and say, “What is the end goal here?” At some point, these chickens are going to have to come home to roost.

Tommy Blackburn: I guess your only thing I can think is you're figuring people will deploy this money back into the economy wiser than the government ever could, and somehow through growth and taxes on that growth that it'll overcome it.

It's the only logical thing I can think of. I'm not sure that I completely buy it or that it's been that well thought out, but that's the only logical thing. I think, John, we do want to go to GPO and WEP. I think we want to do that in this episode. I wanted to share our understanding is these are not changes that can just, by the stroke of one pen be done.

I believe that, and not even through the budget, what do they call it? It's not, is it reconciliation? This is how we have the current tax cuts, which seem very likely to be extended. My understanding, as I've read, is Social Security taxation would require over 60 votes in the Senate in order for them to make that change.

It seems like a little bit of a larger hoop to get through. Doesn't mean it couldn't happen, because as we dive into GPO and WEP, things are happening, it would appear. It could be possible, but it's going to take more bipartisanship to get you there.

John Mason: Thank you for bringing that up, Tommy.

Maybe again, I don't want to overstep, and we're not economists. We're not, we don't really know what's going to happen, but we know that when you gave money out during COVID, whether it was to businesses or stimulus or what have you, it all led to inflation. And everybody was very upset about inflation, and I think we still are upset about inflation, and with the Social Security Fairness Act that we'll transition to now, and those changes, giving people more money, and then reducing the taxes, giving people more money, I think it may meet the definition of inflation if you don't increase production; you have more money chasing less goods, or the same amount of goods, so if we don't see a commensurate rise in supply, I think you can make a case that some of these policies are inflationary.

Tommy Blackburn: But, again, sometimes we can't help but pontificate a little bit here, but we'll do our best to plan for our clients and their best interests with, again, as I say, at least the music that's being played. Whether we agree with something or disagree from a larger perspective, our thoughts on it, we're always going to do, put our clients best interests first and try to give them every advantage we can.

And so now, maybe if you agree, we'll go into WEP and GPO. And again, we, I think Episode 11 and 12, we specifically went through these. So we'll give you a quick high-level on what these are and discuss some of the potential changes coming there.

John Mason: Windfall Elimination Provision, I think, is a good one to start with.

Windfall Elimination Provision impacts your ability to receive your own Social Security and retirement. Windfall Elimination Provision impacts those people who have a non-Social-Security-covered pension. The question is how much does Social Security Fairness Act cost? The question is whether or not they know how many people are actually impacted because it's CSRS.

It's CSRS offset. It's FERS transfer. It's spouses of those people who never paid into Social Security in their own right. It's California. It's New Jersey. It's any system in the country that never paid in and has a non Social-Security-covered pension. So Windfall Elimination Provision is a big deal and impacts a lot of people.

So again, it impacts your ability to collect Social Security based on what you've paid in. A quick example here would be your Social Security statement: if your CSRS offset or first transfer says you're going to receive $2,000 a month at age 62, but you only had 15 or 20 years of substantial earnings that's defined on the Social Security WEP chart what substantial earnings are.

If you don't have 30 years of substantial, and you have a non-covered pension, your Social Security statement is in fact lying to you. You will not receive $2,000 a month. You will receive $2,000 less the impact of the Windfall Elimination Provision. So again, this reverberates, guys, throughout the country, many different systems and many different classes of federal employees.

I pulled this one out pretty quick, but first, transfers like how many financial planners know about a CSRS to first transfer and that special handbook? And those folks are impacted by WEP but not GPO and it's okay; you think Social Security Administration is going to find those people? Because I don't.

Tommy Blackburn: Not until they're swamped. Yeah, I don't know if they're going to find, yeah, finding them, I don't know, and even learning how they should deal with it. I'm sure we're going to go through some growing pains for a while before they became pretty adept at it. I think that's great, John, what you laid out.

I was thinking sometimes I just try to think like, why does something exist? And sometimes I have no idea. I really don't know why we have certain rules in place. My understanding and how I think about it for folks, like John said you had your CSRS or some system where you didn't pay in, let's say you did contract work, you did something afterwards, you did pay in Social Security tries to replace a lower income first.

And it is meant to help lower income more than higher income. And the way the system looks at a high level, if they didn't do WEP, is they would look at those years of earnings of when you were in Social Security work and think, “Oh, we need to replace more because out of that 35 year calculation, they were broke.”

They've got zeros in there. And so it's trying to smooth to get back to the answer that this system was supposed to be to replace more income for those who have earned less throughout their careers versus you have a CSRS pension, which is usually a very robust pension. And so maybe it's not always about fairness so much as it is, this was meant to be this was supposed to be a safety net kind of system.

It's not supposed to be fair. It's supposed to help those who are considered to have lower income. So that's why it was put into place. And then of course, people get upset because they've paid into the system. They see the statement, as John said, and you get excited, “I'm going to get $2,000 a month.”

And then you find out, “I'm gonna get $1200 a month. I'm pretty upset about this.”

John Mason: What's the material impact on your financial plan, Ben, if you're working with a financial planner who doesn't click the Windfall Elimination Provision button inside of RightCapital or MoneyGuide?

Ben Raikes: That's right. Who doesn't know the button, doesn't know what it means, just know that it exists.

Tommy, I think a little bit further to your point, maybe just, I'm going to use a really easy example. Let's say you made $50,000 a year for your entire working career. When you turn on Social Security benefits at your full retirement age, Social Security might give you $35,000 a year when you retire. If you made $150,000 for your career, when you turned on Social Security benefits, now maybe you make $40,000 a year.

So it highly compensates an income replacement rate for those who didn't earn as much throughout their careers, to whereas if you earned a lot more than those folks, you only get significantly less of an additional benefit in your Social Security. So they're really trying to help those that didn't earn a ton in their career. And so the Windfall Elimination Provision looked at this and said, okay, we have these CSRS folks that have never paid a dime in, they're getting a hundred thousand dollars a year in pension income. That doesn't seem fair to let them also collect the maximum benefit from Social Security by just working a few years.

I know I'm repeating a lot of what you just said, but I think sometimes those dollar examples can help people understand the calculations and how they work and, fair or not, at least what we might try to think the federal government was intending to do when they put these systems in place.

John Mason: Agree or disagree with Windfall Elimination Provision and Social Security Fairness Act regardless, it may pass.

And if it does, watch out world. I don't know how it's gonna get implemented, but I sure hope folks are either working with us or somebody like us, because it's gonna take 3, 4, 5 trips to Social Security to get what you're entitled to. A quick story, which we shared as we were prepping for this podcast, is I had a client turn on Social Security at age 70 last August and the rule stated that when he turned on his social his spouse—keep in mind, they're both private sector.

No, WEP. No GPO. No complications like straightforward simple. When he turned on his 70, she was supposed to get a $500 or $600 a month pay raise. One month goes by, nothing; two months go by, nothing; three months go by, I get an email, and they're like, “John, we didn't get a pay raise.” I'm like, “Maybe you did, but we put in place a 22% withholding. Can you send me the letter? Maybe this all just worked out to you didn't get a net increase in your deposit, but you did get the increase.”

Turns out they had to go down to Social Security, sit in the office for four hours, to get something that you would have thought would have been automatic. Asking them, please increase me to what I'm entitled to.

Tommy Blackburn: It is bewildering. You would think things are automatic. And I'm just thinking, again, people who belong in the Social Security system 100% and the things that we go through with them. Even my own mother she was, I call it one of the last Mohicans in that she was able to take advantage of the file and suspend.

And so she was collecting half up until she turned 70, at which point she flipped over to her benefit. But this is still not that unusual, right? Man, talk about an antiquated system, because it was like national, eventually we're talking to national office and Social Security, yeah, we see what you're saying, but we can't do anything here.

You got to go back to the local offices, and then the local offices were like, “Actually, I gotta send you to somebody in Mississippi,” like in the phone tree, and then eventually we come back to the antiquated system. So I'm just thinking if we went through that, we did eventually get to the right answer, but if we went through that, to your point, yeah, you can only imagine with these scenarios the chaos that's gonna ensue.

John Mason: So Social Security, when it was created in like 1935, like our audience can go back and read stories, I think her name was like Ida something or other.

Tommy Blackburn: Ida May.

Ida May, who received the first benefit, she like, paid in a penny and received a hundred X what she paid in or something over her lifetime. I think she lived into her 90s, Ben.

I think she made like one, literally one or two deposits into Social Security and then received benefits for 30 years.

Ben Raikes: She paid in 27 bucks and over her lifetime received $27,000.

John Mason: Yeah. This was day one of Social Security. The system was broken, flawed, like literally day one, the first recipient ever.

It was broken and flawed. Since it was created, life expectancy has gone up. People are living longer, and what was originally designed as like a welfare protect our old age and survivor disability insurance, OASDI, has morphed into a retirement planning tool, and what we're doing now is we're getting further and further from the intent of the original system, which was OASDI, and now we're talking about making Social Security tax-free for the wealthy.

And I think it's just further and further from the original intent of the program. Tommy, do you want to define government pension offset?

Tommy Blackburn: Yeah. So government pension offset. This just says, so if your spouse is in the Social Security system, say they worked a career, they have a benefit.

Typically, almost to John's example, we had a 70-year-old client in Social Security system turned on their Social Security. Their spouse is now entitled to the larger of any benefit they earned in the Social Security system or half of that other spouse, half of their normal retirement age benefit.

So GPO says, I think with the intent there, and again, I only go down the intent, not to say fair, not fair, but it's just. Sometimes if you can understand the intent, you can begin to understand how we got to where we are—is okay if we only had one earner in Social Security, a normal situation, not CSRS, not some system that didn't pay into it, and we had another spouse stay at home, raise the family, etc.

That kind of classic example. We want them to be confident because they didn't go out and work. And so we're going to build this in a way that they get half of that working spouse while they're both still alive. GPO says, that was the intent, but we take the normal rule that we just said, and we look at spouse that just did a CSRS career pulling $100,000 of income in.

That's not the spouse we were thinking about when we put this “you get half of the other spouse's benefit.” So GPO just says, we take a formula and we look and pretty quickly just say, “Yeah, you're not getting that spousal, that half benefit because your non-Social Security pension is so large, we've gotten so far from the intent.”

So that's what GPO is, and now that we're talking about potentially removing it, we don't know how this is going to play out, and right now it seems there's momentum between both houses of Congress. So if we removed it, it could be like, Hey, I worked even at a university system that didn't pay into it.

And I'm drawing a good pension. I've been very successful, but I haven't been able to collect on my spouses because of GPO. Now all of a sudden I'm going to get half of their benefit. So that could easily be $20,000 or so a year that now will be freed up because that test would be gone.

So hopefully I did a decent job trying to explain what GPO is.

John Mason: I think you did a great job. The only thing maybe to also add to that is not only spousal benefits while your spouse is alive that you're entitled to, it would also unlock survivor benefits if you're non-Federal employee, non-New Jersey, non-California spouse survives one of those other people, now all of a sudden we've unlocked survivor benefits that we didn't have before.

And Ben, I know where I want to go with this, but I want to let you, please define for our audience, if John and Sarah are married and we both make $40,000 a year in Social Security and I die, how much money does Sarah make?

Ben Raikes: $40,000.

John Mason: What happened to the other 40?

Ben Raikes: What you and Sarah would be entitled to, John, is essentially at your death, the surviving spouse would be eligible to step into the shoes of the higher earner.

So since you all earned the exact same amount, $40,000 each, there is no higher earner. And so essentially one half of your benefit goes away. It would work, in the ideal scenario, those two benefits would be different, right? If John made $60,000 and Sarah made $20,000 and John were to pass away first, then Sarah would be bumped up to $60,000.

So your Social Security is already offset in some type of way. But again, that's some of the process of the GPO is saying, “Social Security is already offset. We're going to offset this government pension benefit as well.”

John Mason: I can't change that. That's just the rule. One Social Security check is going away.

Poof. Gone. See ya. Okay. Great. So now Tommy, me and you are married. And I'm CSRS, and you're private sector. If I decline survivor benefits on my CSRS pension and I die, how much do you get from that?

Tommy Blackburn: Zero.

John Mason: Okay. And if you die first, on your Social Security, how much do I get from that as a CSRS person?

Tommy Blackburn: With GPO, zero.

John Mason: Zero. Nine times out of ten, zero. I'm actually angry about this one a little bit more, because in order for the CSRS to transfer to Tommy, I had to pay for a survivor benefit to do that. I had to do that. If they eliminate GPO and they just give me Tommy's Social Security benefit, Tommy didn't pay for survivor benefits.

He didn't do anything on that specific thing to leave that to me. I had to pay for my CSRS to transfer to him. I didn't have to pay for Social Security to transfer to him. If we talk about Social Security Fairness Act, I'd like to see in this: Let me pay 10% of my Social Security so that at my death Sarah keeps hers and gets half of mine.

Like, why do I not have the same option to do that? Or if we're gonna open this up, it seems like you should have to pay for it similar to how you're paying for survivor benefits on any other pension.

Tommy Blackburn: Yeah, it's a really good illustration. It definitely seems like it puts the majority of America that all they have is Social Security at a disadvantage if you do this. And they've also been the ones paying into it. So it is an oddity there.

Ben Raikes: And think about how much of a windfall it could be for someone who's never paid into the system if you're a CSRS earning $100,000 dollars and maybe your spouse also worked a full career and took at age 70. And now they're making $50,000 in Social Security.

If you were to collect a survivor benefit with GPO, you would essentially get 0 at their passing. We get rid of the GPO and now you're getting $150,000 a year in income and $50,000 per year of that income. The survivor Social Security benefit, you didn't pay a single dime into the system.

Tommy Blackburn: And now we're talking about making it ttax-freeon top of that.

Ben Raikes: Now it's tax free. Exactly.

John Mason: Yeah, I've got a client who retired SES (Senior Executive Scale), CSRS, she draws $150,000 or $60,000 a year in CSRS pension. And if her first spouse dies, FERS spouse dies before her, she'll get a survivor benefit and now potentially a $40,000 Social Security on top of that.

Fundamentally, I don't disagree with her being able to get Social Security if he paid for survivor benefits on it, but getting it for free doesn't seem right. So I guess in my mind, like I understand the frustration more. on the Windfall Elimination Provision, like I broke my back. I worked two jobs. I did all of these things. Like it feels more insulting to me.

WEP. GPO feels like you've just unearthed so much stuff with GPO that feels wrong and feels completely different than the rules other people are playing by. And if I had a seat at the table, which we don't, and I know we need to wrap this up, I would say, “Okay, if you want in my SES example to leave Social Security survivor benefits to a non-Social Security person, we can do a military survivor benefit open season lookalike.”

You can pay 10% of your Social Security, you can back pay it, you can pay for survivor benefits, and then maybe we can make this system mathematically work by doing that. But yeah, I just, back to the theme guys, I just don't think that all of this has been fully thought through, and on principle, WEB seems more frustrating than GPO.

Tommy Blackburn: I agree. Yeah, I think WEB is a harder one to wrap your head around, to your point. I don't think it's completely unfair when you think about the intent of things, but yes, that one's easier to be like, yeah, that feels, yeah, I understand why you're upset.

John Mason: I worked harder than everybody else.

Tommy Blackburn: Yeah, you did pay into it. There's some valid gripes there. Whereas GPO is, we're talking about giving benefits for something that you didn't put into, which, the other argument is like, but my spouse did. And like the private sector spouse gets it too. But in your example, you just said what if both spouses worked?

Which is the same example of you just worked, federal that you didn't pay in, but the Social Security spouse that worked. They don't get any benefit. So it's hard to call it fair, right? Doesn't seem by most traditional definitions fair, but I guess that's all an eye of the beholder.

John Mason: Guys, as we wrap up this episode, my thought general, our idea here is support, empower, educate, motivate. Hopefully, we've done a good job educating our clients, our audience, everybody who's listening to this on, the planning considerations around it. Sure, we've shared our thoughts, but like really the message that I hope was abundantly clear today is TurboTax is very confusing, and we don't like it when most of our clients do TurboTax because it's like really hard sometimes to get the tax planning correct, if you don't know what you're doing in the software, it's sometimes hard to get the right result.

I think this is another classic example that, like, when these dominoes start to fall, what's the action plan? And who are you going to turn to to determine, A, what you're supposed to be entitled to, B, if they give you something, if it's the correct number?

When those dominoes start falling, like, where are you going to turn? Is it Mason & Associates? Is it another financial planner? Are you a DIY-er and you're going to become the expert on this over the course of however many months or years? How motivated will you be to fight this battle alone if you don't have somebody in your corner?

So to me, it just comes back to there's a reason we want to have a plan in place, and there's a reason that we want to know that we have a team of professionals that can help us through this, because when stuff starts falling, if we just think about everything that could happen next year, tax law changes, tax-free Social Security, potential elimination of WEP and GPO.

Oh, by the way, there's new 401k contributions. They go into effect next year for those 60 to 63 years old. You start thinking about the stuff that literally happens every single day. Plus all this new stuff that's going to happen. It's a lot.

Just have a plan. Just have a game plan. Like, when dominoes start falling, you're either going to have to do that on your own, or you're going to have to know you've got a team that can help you through it. But it's coming.

Tommy Blackburn: And it's, yeah, as I think about from our perspective in life, I don't know, I'm really just appreciating having other experts in your corner. Like I really appreciate when I can cut to the chase on something and just know that somebody else does this all the time. They have the expertise; they're thinking about it day in and day night, and it's still difficult for them, but they're at least in the game, and it's what they do.

So they're proficient. There's just a ton of value in that. So I think that's the point you're driving home to me, John, is like having that expert who they're dealing with this day in and day out and they're thinking proactively about. What these changes could mean, and then once these changes come through, helping execute and continuing to plan and adjust you just have to respect that value, the expertise.

I know it's not for everybody but that's certainly where my mindset would go. It's almost the same as I think a guest will have on here. I think about that concierge functional medicine doctor where it's, this is what you do all day. I can go and research and bumble around with supplements and trying to understand everything.

Or I can just cut to the chase and partner with somebody that's an expert in this.

Ben Raikes: What's your time worth to you? I think is what it comes down to me, or maybe you are a DIY-er who has a ton of fun evaluating and researching, doing all of these things. But if you don't have, if you're not cut from that cloth and that kind of thing doesn't bring you energy, the world is always changing fast, as John pointed out, between WEP, GPO, potential extension of Tax Cuts and Jobs Act, tax free Social Security, 401k limits are increasing 401k contribution limits are increasing.

This is what we think about live, eat, and breathe every single day. And if you'd rather have someone in your corner that can quickly, at the snap of a finger, tell you, “Hey, here's what we should and shouldn't do. Let's talk about it.”

If that's valuable to you, then consider reaching out to an advisor, whether it's us or your current advisor. And just again, how much is your time worth to you? Do you want an expert to quickly give you the answer or not?

Tommy Blackburn: I have to piggyback on that because it's how much is your time worth? And then how do you know you even got to the right answer or you didn't get wrapped around the actual, so you could have easily spent a lot of time and got to the wrong answer versus not to say that we know we'll always get to the right answer, but we've got the experience, we've got a team we have a lot of resources around getting to the correct answer and saving your time.

John Mason: And remember guys, opposites attract. Like at the end of the day in our household, I probably no surprise to the audience like Sarah's involved in our finances, I do most of the financial management. If I passed away yesterday, I'd want Sarah to hire Tommy or Ben. And she would do that because she already has a relationship with Tommy and Ben.

Opposites attract. We are not promised anything in this world. We're not promised how much time we have with our loved ones, how much time we have on this planet, and at the end of the day, we're not promised how much time we have our cognitive abilities. I know for sure that there are many capable people who have hired us because they've recognized that their spouse is going to need us if they die first.

And that insurance policy is invaluable. And I just want our audience to understand that too. DIY works. It does, but it may not work for the survivor of the two of you, or it may not work when life throws you a curveball. There's tremendous value in working with a team of professionals and knowing that when the hardest times of life happen, that you're not going back to the drawing board trying to figure this out on your own.

Guys, thank you for another awesome episode of the Federal Employee Financial Planning Podcast. Audience, thank you for everything. Thank you for being on this journey. Today's November 26. We're almost three years completely strong recording this podcast. We appreciate you. We appreciate you, clients.

Thank you for being here. Remember, we're financial planners first; we do this second. And we'll see you right here next time on the Federal Employee Financial Planning Podcast.

The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.

We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.