Social Security Fairness Act increases need for financial advice

Current and former public sector employees are expected to receive an extra $20 billion a year for 10 years as a result of the Social Security Fairness Act, which President Joe Biden signed into law on Jan. 5. The extra payments also will benefit spouses, ex-spouses and survivors of public sector employees impacted by the new law.

The Social Security Fairness Act repeals two provisions that reduce or eliminate Social Security benefits for public sector workers: the Windfall Elimination Provision and Government Pension Offset. The legislation will mean that millions of Americans who have worked at least part of their career in the public sector – as well as their spouses, ex-spouses and survivors – may receive higher Social Security benefits, or new access to them. For the millions of Americans affected by this new legislation, the impact on their retirement plans may be significant, said Ron Mastrogiovanni, president of HealthView Services, which published a white paper on that impact.

For individuals with public pensions, WEP reduced eligible retirement benefits based on the number of years the individual worked in the private sector and paid into Social Security. In 2025, the maximum reduction to benefits (which would apply to anyone with 20 or fewer “substantial earnings” years) would have been $613 per month, meaning that was the highest amount that could be deducted from eligible retirement benefits.

Mastrogiovanni noted that although individuals receiving traditional pensions from public sector jobs (and their spouses) are the primary beneficiaries of the Social Security Fairness Act, those receiving foreign pensions, which were subject to WEP, will benefit from the elimination of its provisions as well.

He estimated about 3 million people will be impacted by the new law, and advisors must work with them to develop or restructure a retirement plan that considers the additional Social Security funds that may be coming their way.

“In some cases, you're looking at over a half-million dollars in additional income over a projected lifetime,” he told InsuranceNewsNet. “You have to redo the plan. And given increases in life expectancy, it makes sense for an advisor or agent to look at what makes the most sense, whether it be an insurance product or traditional investment products and what is the right mix for the client.”

GPO impacted spousal, ex-spousal and survivor benefits based on the monthly value of a public pension. Unlike WEP, GPO could – and often would – completely eliminate a potential benefit (WEP could only reduce it). After two-thirds of the value of the public pension was deducted from potential Social Security benefits, the remaining balance (if any) would be paid to the beneficiary.

Taxes and Medicare surcharges

The repeal of WEP and GPO will significantly increase the benefits of public sector employees who would have otherwise been subject to their restrictions.

However, Mastrogiovanni cautioned, as with all aspects of Social Security, the higher benefits should not be looked at as money in the bank. Unless taxation on Social Security is eliminated, increases in benefits may lead to some beneficiaries falling into higher tax brackets, as well as being subject to higher Medicare Part B & D income-based surcharges. These can increase premiums – deducted from Social Security - by 35% to more than 200%

Impact on Social Security solvency

Although the new law increases benefits for qualified public sector employees, it will have a detrimental impact on the Social Security program’s solvency. As detailed in HealthView Services’ October 2024 white paper on Social Security Funding Options, without changes to address the shortfall in 2031, the program will have the capacity to pay only 79% of benefits to current beneficiaries. Increasing benefits payments will raise pressure on the program, the likelihood of cuts, and the urgency to implement changes.

It will be important for clients to work with financial advisors to understand both gross and net benefits after tax and Medicare deductions. Although President-elect Donald Trump stated that Social Security income should not be taxed, as advisors work with clients to update retirement plans to reflect these changes, the best starting point for planning purposes should be to re-run numbers based on the elimination of WEP and GPO.

Conversations also need to consider Social Security’s current funding challenges and the potential for changes to the program that will be required to ensure its solvency. These will one way or another include direct or indirect cuts to benefits, which are made more urgent with every additional unfunded increase in benefits or potential reduction in taxes. Some financial professionals may consider viewing only a portion of projected Social Security income for planning purposes, reducing expected benefits by 10%, or as much as 21%, to account for potential reductions due to solvency challenges.

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