The Best Explanation of the Windfall Elimination Provision

If you have a pension from a job where you did not pay Social Security taxes, your benefit may be reduced by the Windfall Elimination Provision (WEP). How do you know if you’ll be impacted? Don’t expect it to be on your Social Security benefits statement. This may surprise you but your Social Security statement does not reflect any reduction in benefits due to this provision. The Social Security Administration will  wait until you file to tell you how much the reduction is if you qualify for both Social Security and a non covered pension.

 

the windfall elimination provision for teachers, firefighters and police officers

Understanding if a reduction in benefits will apply to you, and how much that will be, does not have to wait until you file for Social Security. You can find out today. It starts by understanding the mechanics of the Windfall Elimination Provision.

The Social Security Amendments of 1983 introduced the Windfall Elimination Provision (WEP) as part of an effort to keep individuals from “double dipping.” This was defined as receiving both a pension from a job where they did not pay Social Security taxes and a Social Security benefit.

This new provision began to reduce Social Security benefits for those who worked in a job in which:
1) They did not pay Social Security taxes
and
2) Qualified for a pension from that job.

Teachers are one of the most common groups to be impacted by this rule but it often includes other public sector workers like firefighters, police officers and numerous other state, county and local employees.

Non Covered Employment

In the beginning, Social Security didn’t cover any public sector employees. However, over the years, many states dropped their own pension plans and adopted coverage agreements with the Social Security Administration. However, there are still several states who do not participate in Social Security. Instead, they have their own state run pension plan. For workers in these states, the rules for collecting a non covered government pension and Social Security can be confusing and maddening.

That’s especially true if you’ve paid into the Social Security system for enough quarters to qualify for a benefit. It’s quiet common too. Many individuals find themself in this situation for a variety of reasons. For example, Firefighters often work second jobs where they pay social security tax. Police Officers will often retire at an early age and move on to another “covered” job. Many teachers came to education as a second career, after they’ve spent years working in a job where Social Security taxes were withheld.

Windfall Elimination Provision Mechanics

The Windfall Elimination Provision (WEP) is simply a recalculation of your Social Security benefit if you also have a pension from “non-covered” work (no Social Security taxes paid). The normal Social Security calculation formula is substituted with a new calculation that results in a lower benefit amount.

Covering the topic exhaustively would require a multipage essay, but the necessary components of the WEP can be distilled to a few simple points:

  • The maximum Social Security reduction will never be greater than one half of your pension amount. For those filing at full retirement age, this reduction is capped at a monthly reduction of $428 (for 2017).
  • If you have more than 20 years of substantial covered earnings (where you paid Social Security tax), the impact of the WEP begins to diminish. At 30 years of substantial covered earnings, the WEP does not apply.

windfall elmination provision reduction 2017

 

Source: Devin Carroll, Data: Social Security Administration

This phase-out of the WEP reduction offers an incredible planning opportunity if you have worked at a job where you paid Social Security tax. For example, if you worked as an engineer for 20 years before you began teaching, you may be able to do enough part time work between now and when you retire to completely eliminate the monthly WEP reduction. This phase-out of the WEP reduction offers a great planning opportunity if you have worked at a job where you paid Social Security tax.

Would it be worth it? If you consider how much more in benefits you could receive over your retirement lifetime, it could be worth $100,000 in extra income over a 20-year retirement. Obviously, not everyone has the option of accumulating enough years to wipe out the big monthly WEP reduction. But for those who do, or can get close, it’s worth taking a closer look.

For more information, see the Social Security Administration’s WEP Benefit Calculator.

How the WEP is Calculated

When Social Security benefits are calculated, the SSA inflates your historical earnings, takes your highest 35 years of earnings and divides by 420 (the number of months in 35 years). This gives them the inflation adjusted average indexed monthly earnings that are then applied to the formula. The result of this formula is your primary insurance amount (PIA) which is also known as your full retirement age benefit.

If you have a pension from work where no SS was paid, your benefits are calculated on an alternate formula. The result of this alternate formula is a lower benefit amount.

At first glance this alternate formula looks nearly identical to the the ‘normal’ formula. However, upon closer inspection you’ll notice that the earnings between $0 and $896 are credited to your final Social Security benefit at 40% instead of the 90% found in the normal formula.

 

 

When WEP Application Ends

There are a few circumstances where the application of the Windfall Elimination Provision will end. The result is a recalculation of benefits using the ‘normal’ calculation formula.

Here’s the section of the SSA website that discusses the circumstances of this recalculation.

5. When WEP application ends

The WEP computation is no longer used when:

  1. the entitlement to the pension payment ceases or the proration of a lump sum payment based on a specified period ends,
  2. the NH dies (in the month of the NH’s death, the PIA is recalculated without applying WEP), or
  3. the NH becomes eligible for the WEP exemption by earning 30 YOCs. (The system will automatically identify additional YOCs and consider a recomputation for WEP.)

The most notable point is the when an individual who is subject to the WEP dies. In this case, the survivor’s benefit is recalculated without the WEP.

For example, before Dave became a Texas teacher he worked for a large retailer for 19 years. Because of his teacher’s pension his SS benefit was subject to the alternate WEP calculation. What should have been a $1,500 SS benefit became a $1,100 benefit. Unfortunately, Dave died at 70. His wife fully expected to receive his $1,100 SS benefit as her widow’s benefit, but instead she found out that her benefit would be closer to $1,500. This was because the WEP penalty was removed when Dave died.

Effect of Filing Early or Filing Later

So what happens if you file early? Your benefit amount is reduced due to your age, but does the WEP penalty decrease as well? The same question could be asked about if you wait until beyond your full retirement age to file. Will your penalty amount increase? The Social Security Administration has a page where they discuss this, but it is not clearly written (no surprise).

Here’s what happens to your Windfall Elimination Provision penalty if you file before or after your full retirement age.

The Windfall Elimination Provision reduces your benefit amount before it is reduced or increased due to early retirement or delayed retirement credits. It is this WEP-reduced benefit that is increased, or decreased, due to filing age.

For example, let’s assume Sue is 66 and has a Social Security benefit of $1,428. The “maximum” WEP penalty that could be applied is $428. This gives her a WEP reduced benefit of $1,000 (1,428 – 428).

If Sue files for her benefits at 66, her benefit is $1,000.

If Sue files for benefits at 62, her benefit would be $750 ($1,000 WEP-Reduced Benefit – 25% Reduction for early filing)

If Sue files for benefits at 70, her benefit would be $1,320 ($1,000 WEP Reduced Benefit + 32% Increase for later filing)

See the chart below for the visual.

windfall elimination provision increase or decrease based on filing age chart

If your full retirement age is something other than age 66, your age based reductions and increases will be different.

Here’s where this gets interesting. While the Social Security Administration is fond of saying that the maximum WEP penalty is $428 (for 2016), the effective penalty could be higher than that.

If you compare the benefit amount of two individuals, one who is not subject to the Windfall Elimination Provision and one who is not. They both have an identical benefit amount and both wait until age 70 to file. While the penalty that is levied on the WEP individual is $428, the remainder of the formula increases the amount of actual penalty by an additional $107. The end result is that the individual who is subject to the WEP is receiving $535 less than he would have if he would not have been subject to the WEP.

windfall elmination provision effective penalty chart

This knife slices both directions. If an individual files early, the effective penalty is lower than the actual penalty of $428. Consider the same example of an two individuals who file at age 62. Again, the penalty that is levied on the WEP individual is $428 but the remainder of the formula decreases the amount of actual penalty by $107 to a total of $321 per month.

windfall elmination provision effective penalty chart 2

As with most things Social Security related, the “maximum” penalty is not always the end of the story.

Before you leave, I’d love to hear your thoughts.

How does this rule surprise you?

In what way is it more or less complicated than you have previously thought?

Also, you may want to check out this video I made on Social Security for Educators.

the heros penalty book about wep and gpo

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Joe Dirvin
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Politicians and Bureaucrats don’t need guns to rob us, they use laws written so obscurely and not advertised that when they hit you it like a thief in the night. I am dealing with Agent Orange and the VA after serving as an infantry troop in the 1st, 2nd and 5th ranked most heavily sprayed areas of Viet Nam (Aspen Institute study). Not a dime for me and my extended family until I have cancer, which unfortunately everyone of my platoon mates have. Then I need too depend on the “Health Care” from the VA. Good grief. I just found… Read more »

bumble bee
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bumble bee

I don’t understand the horror to this. If you don’t pay SS taxes for 30 years yet get a pension from where you actually worked, it washes and probably will get more than SS would pay. That’s why we pay such high taxes to compensate for the city employees getting 100% of their salary when they retire. Although I think that’s changing to a more reasonable amount. What am I not seeing here. Why should you get both???

Jim Witkin
Guest
Jim Witkin

Hello, very good information. My wife is a UK citizen but has lived and worked in the US for the past 20 years. She is entitled to pensions in both the UK and in the US, including Social Security. Her UK pensions would obviously qualify as “non covered” pensions, as there was no contribution to US social security. So I have a few questions: 1) is she subject to the WEP on her Social Security benefit? 2) If so, when calculating the WEP “penalty” does it include every type of pension? In other words, she is entitled to a state… Read more »

Russ
Guest
Russ

When I applied for social security my benefit was reduced from $700 to $350 because of the WEP. I just looked at my earnings history and have actually paid social security taxes for 35 years as I usually had part-time income while I worked for the city as well as my employment prior to and after that career. Would it do any good to have them reevaluate my benefits?

Christine
Guest
Christine

Can the Windfall Elimination Provision reduce the amount of social security benefits by more than the amount of a government pension? Example: You work in the private sector with 24 years of “substantial earnings” and have social security benefits of $2000 per month. Then, you work a part-time government job that doesn’t withhold social security, and you are required to contribute $2000 per year to the pension program. You leave that job after 5 years and receive a lump sum from that plan of your contribution of $10,000 plus interest of $500. That $10,500 divided by 20 years (a guess… Read more »

Peggy
Guest
Peggy

Do both the WEP and the GPO come into play when spousal benefits would be higher than the individual’s own social security benefit? Ex: Firefighter retires and has worked sufficient quarters outside of firefighting job to qualify for social security on his own. However, his spousal benefit under his wife’s social security would be considerably higher than his own social security benefit. The windfall elimination provision applies to his own social security benefit as explained above. When considering the spousal benefit, is this where the government pension offset (GPO) comes into play?

Charlie
Guest
Charlie

“While the Social Security Administration is fond of saying that the maximum WEP penalty is $428 (for 2016)”, it is really based on the year you reach 62. If you turn 62 in 2011 the maximum WEP penalty is $374.5. It is not based on the year you apply for social security.

Jocelyne
Guest
Jocelyne

I just received a letter today, that my benefits have been cut by $412.00!! I qualify for retirement, but I am still working as a teacher, and can’t afford to retire. Do they have the right to cut my benefits before I receive my pension? That sucks!!!
Thank you for the article. It helps.

Susan guzzetta
Guest
Susan guzzetta

I have looked everywhere and can’t find information that i need. My husband gets social security, and i have an strs retirement as well as a very small social security check due to wep. If my husband dies before i do, can i receive his social security (significantly higher than my ss) instead of mine with a wep offset and still collect my strs pension? He will get half my pension and his full ss if i die first but we are confused about what will happen with ss for me if he dies first.

Sherry
Guest
Sherry

Clear as MUD.😞

Ofer
Guest
Ofer

Thank you for making this so clear.
However, since I live outside the US for the past 18 years I receive a pension from my Israeli employer’s fund and am not clear how the SSA relates to this.
On my 1040’s over those years, my salary was within the 75K exclusion, so I paid no US social security on that.
Will my benefits now be affected?

Joseph
Guest
Joseph

Paragraph five should be updated to state that some federal employees are subject to the Windfall Elimination Provision, too.

Vicky K
Guest
Vicky K

I worked in India in an Indian government job from 1971 to year 1993 before migrating to US in 1996. I am getting pension from Indian government for that job since 1993.
I have been working in US since 1996 and contributing to social security since 1996.
Will my Social security be reduced due to WEP?

Margaret
Guest
Margaret

I am subject to WEP, and I collect SS under my own earnings. When my ex husband dies, I will then collect under his earnings, assuming that I am still alive. Will the WEP rule apply then??

Diane
Guest
Diane

I wish I had read this 5 years ago. I started survivor benefits 6 years ago. 5 years ago I started drawing TRS. I had no clue until yesterday that I was not entitled to both. My debt is over $30,000. I have been reporting and paying IRS on both but it wasn’t until I applied to change to my own SS that I was told of this.

Dorothy Mckinzie
Guest
Dorothy Mckinzie

What if my benefit is initially affected by Wep because I do not have 30 years of substantial services. I go to work and paid social security taxes for an additional 13 years so now I have 23 years of substantial esrmings. Will my benefit be recalculated to reduce the Wep penalty because I have over 20 years of substantial covered earnings?

John Greenway
Guest
John Greenway

I should add to my last post that I came to the USA in 1977.

John Greenway
Guest
John Greenway

Does the WEP apply to a state pension earned before emigrating to the USA? I earned a state pension in England. Non of the pension was earned once I moved to the USA.

Neil
Guest
Neil

opm reduced my federal pension (OFFSET provision) because i was eligible for ss pension. Then I applied for SS and that was reduced because I GOT a govt pension, WEP. I hope the people who did this rot in hell. none of their pensions were reduced i’m sure. regan. what a overated joke.

Mona
Guest
Mona

I forgot to mention that he never paid into Social Security nor did he draw Social Security benefits.

Mona
Guest
Mona

I am so confused. My husband worked his rear-end off for the postal service for a little over 25 years at age 55 and was offered early-out retirement, which he took. We were married for 17 years. He passed away from cancer at age 56 and I was age 39. I receive a survivor annuity without which I’d be in big trouble. I have worked hard, also, and have earned Social Security benefits and am now age almost 65 and would like to retire at age 66 in a year and three months. I can’t tell whether my SS benefits… Read more »

Sonia
Guest
Sonia

Hi Devin, thank you so much for all you share, it’s amazing and I’m learning a lot. I have some questions, though…I’m from Spain and I worked there 18 years. I now work here in the US (green card about to turn citizen) and I expect to work here some 23 yrs. I will retire at age 67. By then, I will have enough credits here to apply for retirement benefits and also would be entitled to a pension in Spain for the 18 yrs worked there. My question is regarding the Windfall provision….am I going to be affected by… Read more »

Elizabeth Carter
Guest
Elizabeth Carter

I am affected by the WEP and will have 26 years of substantial earnings when I begin taking SS at age 70. If I continue to earn substantial earnings after age 70, will the offset be further reduced? I hope to work until at least age 72 at which time I would have 28 years of substantial earnings – or does the offset become fixed at age 70. Thank you.

Daniel
Guest
Daniel

I wanted to comment on Daniels post about the Rip Off Windfall Elimination Provision . Why is this allowed to continue. Citizens who contributed to the SSA through wage deductions for years, and contributed to the promise of a secure income at retirement , are now being robbed, mugged by ssa bureaucrats, by up to 50% of their benefit entitlement , because of this unfair WEP !! I am a US citizen who now lives in the UK part of Ireland. I worked in both the US , and the UK. and am now retired. The US ssa is now… Read more »

HANNA
Guest
HANNA

I think it is unfair to get penalized for receiving SSC from a foreign country and get a deduction from the SSC here even though have worked in BOTH countries and paid into both systems.

Andy
Guest
Andy

If you used to be a worker who worked in other country over 15 years and moved to US to work over 20 years, you got a pension from that country as $1000 , SSA local office said that they will reduce amount pension to 50% from Foreign Pension. For example, if you got pension for $1000 from China, and you got pension from SSA for $2000, they will cut your pension from SSA to $1500.

Rick
Guest
Rick

Is the wep amount determined the year that you are 62 or 66?

Jeanette Atlas
Guest
Jeanette Atlas

I am so saddened with the Illinois social security law for a retired teacher with a pension in CPS who is a widow. My husband paid into social security for 40 years as a Dentist and I receive nothing. We were married 30 years. That is just wrong!

eddie
Guest
eddie

Not fair for us federal workers to be penalized! . State workers , county and municipal workers collect State Pensions and no penalties against their social security benefits. The double dipping doesn’t pertain to them ! Thanks Reagan for the disparage treatment !

mildred
Guest
mildred

I have worked for the state for 35 years & did some pt jobs (waitress) for 20 years & paid into the social security system;now I am told I cannot collect social security benefits because they take 2/3 of my pension to factor in my soc sec benefit & would only receive $64 a month! wasn’t there a rule back in the 1986/87 that if you worked 20 years PRIOR to 1987 (before it was know as “double dipping”) you would still be able to collect social security benefits that I contributed for 20 years? so many rules with social… Read more »

Sstocking
Guest
Sstocking

I’m not sure this calculation applies to those of us under CSRS offset. I believe there is a different calculation that is used to adjust our CSRS Pension, our social security and WEP. However calculated we never received our full CSRS Pension or our social security…bummer!!!

DANIEL
Guest
DANIEL

I worked in Canada and being a Canadian citizen I had to pay my taxes to the Quebec Pension Plan (QPP) from 1973 to 1983. I then emigrated to France (I am also a French citizen) and started working there in January 1984 until the end of December 1997. In France I contributed to the french Social Security as well as 2 complimentary pensions (AGIRC and ARCO). These are mandatory so one does not have a choice. I paid my US Social Security taxes from January 1998 until my retirement at age 65 and 4 months 04/29/2016. I applied in… Read more »

Rooster
Guest
Rooster

The WeP is an ugly thing for teachers who have also worked in other fields. First of all, you could never repay a good teacher for what they put into the job. I spent $1000s out of my own pocket to build a class library and get basic supplies when I first started teaching. I put in 12 hr days and worked on the weekend. This started to get better after 5 years but only by 25% or so. My starting salary in 1998 was $34000. I did get Summers off but very often took courses and worked on curriculum… Read more »

ROBERT
Guest
ROBERT

The WEP is a travesty. It is completely unfair to reduce a person’s social security amount which they have paid into while working during their lifetime. They have contributed into the system and should receive what is due them for that work. It should not be reduced because they are receiving a pension from “other work”. It is not double dipping. If anything it should be called “double working”, which last time I looked is perfectly legal in America. I think the argument of double dipping is completely wrong since a person is only asking for their social security that… Read more »

Hank
Guest
Hank

The video says “21 years or less” which is true, but I think you meant “less than 30 years”. […and WEP applies to you]

Henry Smith
Guest
Henry Smith

Did not see anything talking about exceptions to the WEP which were written into the original Provision in 94.

Richard Scheel
Guest
Richard Scheel

If I understand the rules correctly: For those with a small pension, there is another factor. The reduction due to WEP is also capped at 50% of the pension. For example, if the pension pays $500 per month, then the WEP reduction will be no more than $250 per month.