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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eddie
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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
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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
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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
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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
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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
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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
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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
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Henry Smith

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

Richard Scheel
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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.