Earlier this year, the Social Security Fairness Act passed into law, resulting in increased monthly benefits for more than 2 million public sector retirees.
The law repealed two prior provisions: the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). The WEP reduced Social Security benefits for those who received government retirement or disability pensions, while the GPO pared down spousal benefits for those who received pensions.
If those changes apply to you, they can boost your income and even affect your future monthly Medicare premiums, according to Isabel Barrow, executive director of financial planning at Edelman Financial Engines.
Investopedia spoke with Barrow to discuss the new law and the impact it could have on retirees. Here’s an excerpt of the conversation, edited for brevity and clarity:
INVESTOPEDIA: Should people affected by the Social Security Fairness Act adjust their spending and saving habits? If so, how?
Barrow: It [Social Security Fairness Act] is retroactive going back to the end of 2023… For all of 2024, you’re potentially going to be able to get a retroactive check if you’re eligible.
But that’s going to be a one-time check. Going forward, you could receive your full monthly Social Security benefits. Right now, it’s difficult to figure out what that is because the Social Security Administration needs to come up with an implementation plan.
Take a look at that retroactive payment and think about applying it to your most important financial need. I would categorize that as any type of unsecured debt, like credit card debt or a high-interest loan. If you have a number of credit cards, you certainly want to look at the highest interest rate first.
If you don’t have debt, take a look at your emergency fund, which should have between six months’ and two years’ worth of living expenses. For those who are retired, your cash reserve in retirement needs to be a little bit higher, between one and two years’ worth of expenses.
If those have already been done, what are your financial goals? Is it having a greater amount of monthly retirement income? In that case, you may want to think about adding this [money] to your investment pot. If you’re living mostly on pensions and haven’t dealt with investments, this is a great opportunity for you to talk to an advisor and get some help on how to invest.
INVESTOPEDIA: Earning extra income from Social Security can impact peoples’ Medicare Part B and D premiums, as those premiums are determined by yearly income. What should people know when thinking about the Medicare premium thresholds?
Barrow: The number one consideration we have when it comes to IRMAA—income-related monthly adjustment amount—is keeping your overall income below the thresholds. The thresholds change every year, but almost everything is categorized as income as it relates to IRMAA. That means capital gains could be tacked on top of your ordinary income for the calculations.
Your Medicare premiums can go up if your income goes above the threshold by even one dollar. It’s important to understand what your total income is going to look like. Before the end of the year, you should get a good projection about how much this change will impact your income.
In November or early December, we recommend that our clients look at the different income streams they have. Add everything up and then cross-reference that with the thresholds. And it’s a two-year look back, [which means your tax returns from two years ago are used to determine your Medicare premiums].
If you think you might risk going over, that’s when you might [ask yourself], ‘Does it matter?’ If you’re over by a little bit, and it’s going impact your IRMAA for an entire year, that may be an opportunity for you to look at ways to get some tax breaks, such as by making charitable donations.
INVESTOPEDIA: Is there anything else Social Security beneficiaries should keep in mind?
Barrow: One of the major implications of the Social Security Fairness Act change is that it takes a lot of money to fund it. That’s going to bring down the date at which the Social Security trust fund is going to run out.
Congress is going to need to make adjustments to Social Security to figure out how to pay this. This law doesn’t just affect those who receive the retroactive payment or larger monthly payments—it’s going to impact all of us.