The confusing balancing act between government pensions and Social Security benefits

Dear Liz: I am a public school teacher and plan to retire with 25 years of service. I had previously worked and paid into Social Security for about 20 years. My spouse has paid into Social Security for over 30 years. Will I be penalized because I have not paid Social Security taxes while I've been teaching? Should my wife die before me, will I get survivor benefits, or will the windfall elimination act take that away? It's so confusing!

Answer: It is confusing, but you should understand that the rules about windfall elimination (along with a related provision, the government pension offset) are not designed to take away from you a benefit that others get. Rather, the rules are set up so that people who get government pensions — which are typically more generous than Social Security — don’t wind up with significantly more money from Social Security than those who paid into the system their entire working lives.

Here’s how that can happen. Social Security benefits are progressive, which means they’re designed to replace a higher percentage of a lower-earner’s income than that of a higher earner. If you don’t pay into the system for many years — because you’re in a job that provides a government pension instead — your annual earnings for Social Security would be reported as zeros in those years. Social Security is based on your 35 highest-earning years, so all those zeros would make it look like you earned a lower (often much lower) lifetime income than you actually did. Without any adjustments, you would wind up with a bigger check from Social Security than someone who earned the same income in the private sector and paid much more in Social Security taxes. It was that inequity that caused Congress to create the windfall elimination provision several decades ago.

People who earn government pensions also could wind up with significantly more money when a spouse dies. If a couple receives two Social Security checks, the survivor gets the larger of the two when a spouse dies. The household doesn’t continue to receive both checks. Without the government pension offset, someone like you would get both a pension and a full survivor’s check. Again, that could leave you significantly better off than someone who had paid more into the system.

You don’t need to carry debt in order to have good credit

Dear Liz: You should tell people that they can help their credit score more by not paying their credit card bills in full each month. By not paying in full, but paying the minimum or more each month, it shows the card issuer that you can handle credit wisely and encourages them to raise the limit. This pushes the utilization down.

Answer: There’s nothing wise about carrying credit card debt. The idea that you need to carry a balance to have good scores is a stupid, expensive myth that needs to die.

People who spread this myth don’t understand how balances are reported to the credit bureaus and subsequently used in credit scores. Credit card issuers typically don’t report your balance on the day after you pay your bill. They may report your last statement balance, or the balance on a certain day each month. That’s the balance that credit score formulas have long used to calculate your scores. The scoring formulas traditionally couldn’t see whether or not you carried a balance from month to month, so there was no reason to do so and incur expensive interest.

Recent credit reporting changes will make carrying a balance an even worse idea. Some card issuers have started reporting payment patterns — essentially telling the bureaus which people consistently pay their balances in full and which don’t. That’s because research has shown that people who pay off their credit card bills are significantly less likely to default than those who carry a balance. Mortgage lenders already are considering this information when making loans, even though it’s not something that factors into the credit scores most of them currently use.

Although there’s no advantage to carrying a balance, there is a huge advantage to lightly but regularly using the credit cards you have. That’s what actually shows scoring formulas and lenders that you can responsibly manage credit.

Liz Weston, certified financial planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the "Contact" form at asklizweston.com. Distributed by No More Red Inc.

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