0:00 Welcome to something more with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president, financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it something more because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome everybody to another episode of something more with Chris Boyd. I'm glad to have you with us. We are having a special episode today because there's been some significant legislation that was recently passed and signed into law, it's called the Social Security Fairness Act.

0:50 And we wanted to have an opportunity to share some of the implications of this with you. I'm joined by Jeff Perry and Russ Ball, both of whom are part of our AMR team here at Wealth Enhancement Group. And we appreciate you listening and hope you get a lot out of this. This is something that, Jeff, you've been tracking for months now. This is not the first time there's been legislative rules. Yeah. I've been saying for years I've been tracking this. And with a lot of skepticism along the way, will it pass? Oh, we're down to the last few days. Is it going to make it through? And maybe this is the big one you've been waiting for, for this repeal.

1:32 Let's tell everyone a little bit about what this legislation, the Social Security Fairness Act does, and then we can talk a little bit about some of the particulars. Okay. Let's go back in history a little bit. In 1983, when Congress passed some Social Security form, which increased the retirement age, which was the headline of that bill, they included- And the tax structure, right? Correct. And as I said previously, Social Security benefits had been untaxed. That's right. They became taxable income in varying degrees. And then there was also the change in the age as to full retirement age.

2:15 Increasing it, yeah. Yeah. But there was also this impact. So it was a goal by President Reagan and the Congress at that time to strengthen the Social Security system, right? To make it more- It's solvency. That's right. So, you know, generally a good idea. Well, I'm sure we'll go back to this subject in a minute. And they included a windfall elimination provision in that bill, which basically was designed to prevent or mitigate individuals who had a government pension, civil servants, state and local employees who were not paying into Social Security, but to decrease the amount of their Social Security if they had earned the necessary credits otherwise.

3:00 So they were eligible for Social Security in the process, but were they perceived to be double dipping in a sense, you know, getting benefit from their Social Security benefits and public pension? That's right. That's right. And it, just a side note, in 1977, there was a provision called the government. Why can't I remember the name of this? Government pension offset. I forget it earlier. Which has to do with spousal benefits, how much they could receive. So that was already on the books. Similar idea that as we know, a long time ago when Social Security was created or revised, they wanted to incentivize in that time mothers to stay home.

3:48 Right. And be able to be penalized for not working essentially. I could argue either side, right. Incentivized to stay home or penalized for not working. And they were able to collect 50% of their spouse's Social Security benefits. In the creation of the Social Security, you know, at its origins, there were just a lot more people who, women who were, you know, stay at home moms who weren't part of the workforce that also needed some consideration in retirement. The goal of Social Security was to provide an element of Social Security, a retirement stability for people that they wouldn't be on welfare in retirement.

4:35 So this was like a base income. So this was, it was part of the rationale based on the social structure at that time. That's right. That's a well said Chris. And also as part of that GPO, there's surviving spouse benefits. So if the spouse died, that 50% would go up to a hundred percent. However, when the windfall elimination provision was enacted, they also included the individuals, the spouses or the surviving spouses into that where that benefit, if that was, if they had a private, if they had a government pension in that mix as well, then that Social Security benefit, either one, either spouses or a survivor could be eliminated as well.

5:24 So both of these have been on the books for a very long time. And it doesn't necessarily work identically. The government offset and the windfall elimination provision, but the conceptually, so since we don't have to go into the details on this anymore, the conceptually both would discount the Social Security benefit in differing ways, in different degrees, but for people who either as a surviving spouse benefited from that public pension while receiving Social Security benefits or for the worker, depending on which part of this we're talking about. And we won't get into the details, but I just want to add some commentary is it seemed like the most harshest treatment was to the surviving spouse, which, you know, why probably unintentional, right?

6:13 But still, yeah, it's, it's kind of surprising. The big hit came to the surviving spouse twice, right? They lose somebody and then what they expect to get as a survivor benefit. Got reduced substantially. Their, their Social Security spousal benefit perhaps, and was reduced because of this pension that they got the percentage of certainly was right. So since then, right. So since 1983, this has been an issue and it was an issue for some state and local employees whose states decided not to opt into the Social Security system. Massachusetts was one of them. Not all state and local governments made that decision back then.

6:56 Some said, okay, well, this is the way it's going to be. We're going to opt into Social Security and government employees were paying both. And so that did not affect them. Just the ones that those states said, no, we're just going to stay with our pension system and we understand Social Security would be reduced. So, so it's kind of not a one, one size fits all. Yeah. It's important to recognize that there are many other jurisdictions where the public, they may even have a, a public pension in the state, but they may also be participating in the Social Security system. So it's, it's a, which would make it more like a private pension in many respects in that scenario.

7:41 In our case in Massachusetts, other jurisdictions that not all, but many there is this separate, you don't participate in Social Security, but you're participating in the public pension paying nine to 12% of your salary into the public pension system. Not unlike what you would do in the Social Security. And if you were doing FICA taxes or something like that. So it's a slightly different, but parallel perhaps. And so now this is most relevant for people who qualify for both, right? This is where it's like, what happened when you had your 40 quarters of, of eligibility for Social Security benefits, you, you participated sufficiently to receive Social Security.

8:28 But you also had the benefit of working in the public sector where you got a public pension, where you'd get some benefit there as in retirement. The challenge for this, this windfall elimination provision would, would limit how much your Social Security benefit would, it would be deducted. It'd be reduced essentially. So under the old formula, just to, I know nobody needs to know it, but just a point of reference. If you had your quarters, your 40 quarters, and you had less than 18 years of substantial earnings, you would get the maximum reduction to your Social Security, which was changed every year, but around $550 in the latest year, that would be the maximum windfall elimination provision.

9:19 If you had between 18 and 30 quarters, 18 and 30 years of substantial earnings, your reduction would be on a sliding scale. The closer you get to 30, the less percentage of the reduction. And if you hit 30 years of Social Security contributions at substantial earnings, which really weren't that hard to meet substantial earnings, you would not have any reduction. So people, there's no one, once again, no, there's no single answer for everybody. It really depended on where you were. I'll just share with, I've shared it before. I'm one of those people. I had like 18 years of private sector employment and 26 years of public sector employment.

10:03 So I am eligible for a pension in the pension system in Massachusetts, and I'm not collecting Social Security, but when I was going to collect Social Security, I was probably going to lose four or $500, you know, roughly a month because of where I was in the number of years I had in the private sector. Well, and you mentioned having talked with another, a client of ours, who's benefiting, going to see maybe about a $500 difference in their retirement income as a consequence of that. I had a meeting this morning with, with someone who works for a city in Massachusetts, and he hadn't heard about this yet, but he was very happy to hear about it, the argument to repeal these provisions was fairness, you know, the title of the bill in essence, that if you, for example, if you worked in two different pension jobs, private sector, say you worked in two companies that had pensions and you worked X number of years in each ones, you qualified for both pensions.

11:12 One pension wasn't reduced because you had another pension. It was a matter of fairness. I worked my case 18 years in the private sector. I contributed. I don't have, I have a very low Social Security benefit because I only worked 18 years in, and so I shouldn't be reduced or someone shouldn't be reduced because I chose to work in the public sector as well. That was the political argument. Yeah. I mean, in that scenario, you're saying one pension isn't affected by the other, but in both of those instances, those pensions were also paying into the Social Security system, which, uh, you know, it's apples and oranges for your analogy here, but you follow my point that people were still participating in Social Security all along the way.

12:02 Um, and that, that those, those pensions are irrelevant to the Social Security conversation. As a matter of fairness, it's a solid argument that they are irrelevant to each other, right? Now there's other issues that are always involved with these, these decisions that Congress had to make, but I think, I think it passed because it's a compelling argument because a lot of other reasons, political reasons, I think it passed. There's, you know, roughly 3 million people who are affected by this repeal who will benefit from this repeal. Arguably there are 3 million government employees. So in that 3 million, there's a lot of individuals who are connected to members of Congress, connected to the political system just by being in the government And so there's some, uh, lobbying, right?

12:57 There's some lobbying, all the, uh, retirement associations in the given states were pushing for it for decades. It was a lot of momentum. In fact, there were more sponsors in the House and the Senate of, of the bill. This was HR 42, the name of the bill, but there were more sponsors every session than they were required to pass it. I mean, because the constituents who were affected by this were knocking on those legislators' doors, talking to members of Congress all the time. So the support was always there. The argument wasn't, the argument was never that this is, this is fair.

13:38 This is just, Congress would never make that argument publicly. Um, the argument was it costs too much money, right? We'd like to do it, but it's too expensive. The Congressional Budget Office puts a price tag, um, from this repeal at $195 billion over a 10 year period. Um, and what's, uh, interesting that, uh, of the 51 million retired workers who receive social security. Uh, probably about 3 million are the number that's, that's less than 6% are affected by, uh, this, the impact of this. Well, you know, I, as I, you know, I was alluding to it.

14:19 I have seen articles about, Oh, is the fairness, the social security fairness act fair? You know, I, I think, you know, you've made the case for why it is. Um, I think the, um, the bigger, you know, challenge it affects is how does it affect the solvency of the social security system overall, you know, as you say, this is, it has a cost, um, of, uh, you know, a hundred, nine, 10 billion over 10 years. Okay. Roughly 200 billion. Okay. 200 billion. So, um, you know, that's, that's, uh, over a fair amount of time, but we are also in within that timeframe, you know, 2033, we have the issue of, um, challenge of whether social security benefits will be sufficient, uh, based on who we're taxing at that time to pay benefits, there's the expectation we'll be in a position where, uh, we'll be facing a 21%, uh, or somewhere thereabouts a reduction in benefits, uh, because unless this is addressed the, the, from 2033 or whatever the number was, uh, the CBO, I think, uh, also indicated this might move that clock up.

15:34 Uh, what was it? Russ six months. Yeah. Six months. And so, um, it does have some consequence to, you know, all of us who, um, maybe at, by, I don't know if I'll be participating at that point. I, I haven't done the math. How old will I be then? But, uh, you know, that notion of, uh, the people who are affected by social security benefits. The big issue is we've got to deal with this and the longer the runway to start a better will be. Uh, but you know, the likelihood is, is we'll get down to the wire, you know, over the last several years, Jeff, I've been saying to clients when they ask about this, uh, this notion of social security, will it be, you know, will it pay out, will we receive benefits as planned?

16:23 I've always said, well, you know, I think, um, there's a lot of people in Congress who like their jobs, you know, and there's a lot of voters who are affected by social security. Um, but you know, I'm starting to wonder about the, uh, the plausibility of, you know, when you look at the fact that, um, we have these growing debts, um, you know, uh, what are we almost $2 trillion deficit last year? Um, was it 1.9? I think, uh, something like that. Um, that's the deficit in the annual budget and then the debt that's growing and growing and growing, um, with then you compound that with the fact that we'd have the social security issue, uh, in need of addressing, you know, you could, it's not, uh, unthinkable.

17:13 We could be in a position where, you know, we always worry about, Oh, where's that tipping point, the debt. And, um, uh, the notion that it's partly funded by other people around the world, by the confidence they have in the debt paying ability on treasuries. And, you know, we're, we're up coming this year with the likelihood of a showdown regarding the debt ceiling. And, uh, this is something that could undermine confidence in people's willingness to own us debt, if there's not clarity that we're going to pay our debts. So, you know, this becomes a political football, uh, certainly.

17:54 And so, um, you know, I guess I, I've always had the mindset, Congress is going to deal with it, but you, you could get to a point where the question is, uh, is there still confidence from investors around the world in us debt? Does that undermine the ability, the cost of financing our debts? Could that envision a period of greater austerity? Like we saw in Europe in the last decade, uh, where we might not be as free to simply say, Hey, let's just address this, um, in, in a way that seems very attainable and manageable today.

18:48 And in, uh, 30, 20, 33 is eight years from now. Right. I don't know. Uh, I'll just throw that out there. Uh, what, what are your thoughts? I actually thought that this issue of the social security fairness and their repeal of weapon GPO is going to be handled in a larger social security reform act, where, you know, they take all the, this is just one thing that people say is wrong with social security. I mean, we could have, I'm sure we will. We'll have a whole episode on what, on what we think should be done to solve the financial challenges. That's right. Or taxes, uh, later ages, all these kinds of variables.

19:32 Um, they talk about, um, income, uh, I can't think of the right term for it where if you make so much, Oh, you might not be eligible, you know, it means testing is one of those things. And it's all these different, it's the cap on social security. It's like a tax, uh, where they, why is there a cap? Maybe they don't, or maybe there's a donut hole or something. There's all these different things. Right. Right. Right. So there's, I, I really sincerely thought if I was a betting person, I would have bet that this would be handled someday. Yeah. I don't know what would have happened. You know, I didn't have really a feeling about it. Uh, this was a surprise. If you read the, if you read the commentary from the various retiree and employee association groups.

20:14 Yeah. Kind of snuck up on everyone from the Massachusetts folks. Um, they acknowledged that they've been working on this for 30 years and same thing happened in Congress, you know, it gets through committee and everything. And it doesn't go anywhere. Uh, they had knowledge that they were surprised and they didn't really feel confident that it was going to happen until actually president Biden signed it. I talked to, um, I mean, I'm off topic a little bit, but I talked with someone who's a congressional staffer, who's an old friend of mine, uh, he works in the house and he's not sure, obviously, you know, he's not going to give me like. This is exactly what happened, but sometimes one branch of government passes something to get the, uh, pressure off their back.

20:57 Yeah. If you, if you remember how it went, uh, the house passed it. And then Schumer, uh, who was, who is the leader of the Senate for the Democrats, um, was approached, if you will, cornered perhaps at a union event and said, you know, the house passed it. Why don't you, why don't you? And he, whether intentionally or because of where he was said, we're going to get it out. And then the momentum started and the, you know, the hundreds of thousands of phone calls started to Congress. And so this could be, this could just be one of those things that just happened because of political pressure at the time and political maneuvering. Yeah. Um, it's kind of amazing.

21:37 Uh, yeah. As it kind of crept up unexpectedly, Jeff, um, tell everyone a little bit about, um, how, how quickly people will start to feel the impact of this. When will benefits change? Uh, when will people, when does it take effect in essence? Sure. It takes effect January 1st, 2025. So last week, um, and it is provided to be retroactive. So, you know, it's going to take, yeah, it's going to take social security administration, some time to figure out how they're going to do this. Um, I would think they'd have all the data because they have calculated the, the offsets. Right. So, um, but, so this goes back to December of 2023 or is it January of 2024?

22:23 Like when does, how far back to, is that retroactive? I wonder, uh, article I was looking at, made it sound like it goes back to last, uh, to 2023 to December or some of this, but I don't know if that's accurate. Yeah. I don't know if it's accurate either. I do know it's retroactive, but I'm not a hundred percent sure on the date. I read November 23, November 23. Yeah. Nailed down what exactly that is. So, um, anyway, it's a full year plus that people are, who are affected by this will recover more benefit that they didn't get in that period of time.

23:05 Right. And just for a point of reference, the average increase from the WEP, the windfall elimination provision is $360 per recipient a month. And on the government offset pension offset, the average is $700 increase for, um, 380,000 people who are spouses and the average for the surviving spouse. And this 390,000 of them is $1 ,190. Oh, pretty, uh, pretty impactful. Yeah. I'll tell you what, this is, um, from a Kiplinger article. It says, uh, that the text of the law indicates that the legislation's effective date will apply to benefits payable for months after December 2023.

23:54 So that'd be the entirety of 2024. Right. So by the time they get this done in a few months, you know, people could be looking at maybe a year and a few months. So it's, uh, if you're at the top of that amount, you know, $1,100 between 360 and $1,190 could be up to 10,000, maybe a little bit more. Well, um, so what's the financial planning, uh, ramifications? What should we be? Uh, I think the, the bottom line for listeners is time to revisit your financial plan a little bit. If you think you might be affected by this, um, let's, let's get into the details and, uh, if you're coming into a little bit of money, maybe that's a good opportunity to think about what should you be doing with that?

24:44 Is that part of your, your reserve, your liquidity reserve? Is it part of, uh, you're going to fund your, your goals? Uh, what's going to happen with that when it comes to that change in cashflow? Does that have a material consequence on, uh, your financial profile, your financial picture? I don't know. Anything you want to add to that, Jeff? No, I agree a hundred percent. And it's a good time to re re revisit your financial plan and update the modeling of it, update your income, your monthly income. It may, uh, it's going to make it look better, whatever it is. I would just add, um, as we go to wrap up momentarily, if, uh, you are someone who, uh, is a municipal employee or someone who has, uh, is affected by this, um, Jeff has a lot of expertise on these issues on understanding the, uh, the way the public pensions work.

25:40 And so if you, um, are kind of facing some of the decisions you might need to deal with, uh, we would encourage you to reach out. Um, we can, uh, we've got some great resources here as a team and Jeff, uh, in his wealth of knowledge can be a great tool as well. I think we're going to do some episodes specifically geared toward, uh, those, uh, listeners who might be in benefit from that in the future. So, uh, if you're a public employee, uh, stay tuned and let us know if we can be a resource to you as well. Um, with that, uh, anything else to add? Should we call it a day? Let's call it a day. It's good news for most of us out there. Excellent.

26:20 All right. Well, thanks for listening, everybody. Until next time, keep striving for something more. Thank you for listening to something more with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns, or those quality of life issues that make the money matters matter. Whatever's on your mind, visit us at something more with chrisboyd.com or call us toll free at 866-771-8901. Or send us your questions to amr-info at wealthenhancement.com. You're listening to something more with Chris Boyd, financial talk show, wealth enhancement advisory services, and Jay Christopher Boyd provide investment advice on an individual basis to clients only proper advice depends on a complete analysis of all facts and circumstances.

27:06 The information given on this program is general financial comments and cannot be relied upon as pertaining to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss. Listeners should consult their own financial advisors or conduct their own due diligence before making any financial decisions.