Why the Windfall Elimination Provision (WEP) Should be Reformed 

It’s a rare day that passes without someone asking me, “Will the WEP be eliminated?” 

The WEP is the Windfall Elimination Provision, and it’s a part of Social Security that can really complicate benefits for those who fall under it. This provision can reduce benefits by nearly $500 and the Social Security Administration generally can’t explain the rules around when and how the WEP will apply. Retirees who are subject to this rule are upset and ready for a change. 

Although it’s been talked about for years, I don’t think we can reasonably expect Congress to pass a total WEP repeal. My official stance is that such a change is highly unlikely. However, I do think reforming the Windfall Elimination Provision is likely, and possibly in the near future. 

It’s time for this to happen. Since the Social Security Administration uses 35 years of earnings history in its benefits calculation method, and we’re now at nearly 40 years of the WEP being law, we have enough data to understand if the WEP functions as intended. 

Hint…it doesn’t. 

There’s no reason the WEP should not be reformed, and now. Here are two great reasons why:

Reason Number One: The Windfall Elimination Provision Doesn’t Work As Intended

The Windfall Elimination Provision was introduced to ensure fair treatment between individuals who paid Social Security tax throughout their working years and therefore have covered earnings, and those who paid no Social Security tax and have non-covered earnings. 

When the WEP rule was initiated, legislators thought that individuals were “double-dipping” if they received both a pension from a job where they did not pay Social Security taxes and a Social Security benefit.

In a way, they were correct. From the beginning, Social Security benefits were intended as an income safety net for retirees. It was never intended to replace personal savings. 

This is illustrated in the formula by which benefits are determined. The formula calculates an individual’s benefits based on a replacement rate of pre-retirement earnings. This formula is progressive in that it delivers higher replacement rates for lower-income earners and lower replacement rates for higher-income earners.

In 2020, for example, an individual turning 62 years old with a career average earnings of $24,112 would receive approximately $10,171 per year in Social Security benefits. That would replace about 42.2% percent of their pre-retirement earnings. A higher-income earner with average earnings of $74,063 would receive about $24,288, which would replace about 33% of prior earnings.

 This skewing toward lower-income earners became a problem for public servants with mixed employment in which they earned both covered and non-covered wages throughout their careers. 

The Social Security benefit’s formula uses 35 years’ worth of earnings history to calculate the average pre-retirement earnings. For public servants who work in jobs where no Social Security tax is withheld, these years show up as a zero in the calculation. Zeros in any average calculation tend to lower the overall average and make it appear that these public servants were low-income earners. 

How the WEP Tried to Fix a Problem, But Ended Up Hurting Public Servants

Here’s an example of how benefits were calculated prior to 1983 and the inception of the WEP.

Sue worked as a nurse for 15 years and paid Social Security tax. She decided to leave nursing and became a teacher in one of the states that do not participate in Social Security, and therefore, employees do not pay Social Security taxes. 

After teaching for 20 years, Sue retired. When the Social Security Administration calculated her benefits from the covered employment, they counted 15 years of earnings from her career as a nurse… and 20 years of no income, even though she worked as a teacher during that time period but did not pay into Social Security.

Based on this earnings record alone, it appeared that Sue was a low-income worker. As a result of this, the formula created a higher replacement rate than should have been awarded for someone with her historical total earnings.

It’s this calculation error that became known as a “windfall.” In 1983, it was fixed with the Windfall Elimination Provision. 

Now, after nearly 40 years after the rule’s introduction, there’s enough data to understand that this provision does not always function as intended. It does not always create parity. 

If things were equal, both covered and non-covered workers would have the same replacement rate for the same amount of covered earnings. That’s not how the formula works today.

Let’s consider the case of two individual workers.

In the first example, the worker earned an adjusted average of $45,000 per year of covered employment. When his Social Security benefit was computed through the bend point formulas, he received a replacement rate on pre-retirement earnings of 45%.

In the second example, the earner worked a covered job for 20 years and earned an adjusted average of $45,000. Then she transitioned to a non-covered job for 20 years. Since she qualified for a pension from their non-covered job, this worker was subject to the WEP rules. 

This meant her Social Security benefit formula is completely different than the first worker who only had covered earnings. Once her benefit was calculated, she only received a replacement rate of 34% for the identical amount of covered earnings! 

The result?  The “return” on Social Security taxes in the form of a monthly benefit is lower for the second worker, a public servant. 

Reason Number Two: The WEP Is Overly Complicated

The WEP is not an issue for an individual who spends their entire career in a job where they do not pay Social Security taxes. However, for those who worked in roles where they did pay some years but not every year of their careers, the rule is confusing and maddening. 

Many individuals find themselves with this “mixed employment” 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 job that is covered by Social Security. Many teachers came to education as a second career, after they’ve spent years working in a job where Social Security taxes were withheld.

Because of the complexity, the WEP makes it extremely difficult to plan for a successful retirement. It doesn’t help that the annual Social Security benefit’s estimate does not include the WEP penalty in the estimated benefit. 

Furthermore, most Social Security technicians – let alone financial advisors – fail to understand the nuances of how the WEP is applied. They cannot explain it adequately, and although they may be trying to help, too often only add to the confusion.

It’s easy to understand why the WEP often feels like a penalty for public service, but there’s no reason we need to keep going this way. It’s time for reform.

As new reform proposals make their way through the legislative process, I’ll be here to keep you informed and tell you what you need to know. 

Don’t leave without getting your FREE copy of my latest guide: Top 10 Questions and Answers on the Windfall Elimination Provision. In this guide, I go over more detail on the WEP and answer questions like: 

• Can I avoid the WEP by taking a lump sum from my pension?
• What about 457 accounts?
• Does my pension affect my spouse’s Social Security? 

You CAN simplify the WEP rules and get every dime in benefits you deserve! Simply click here http://www.devincarroll.me/top10WEPSSI. 

In addition, I’d highly encourage you to check out some of the additional resources I’ve created that will deepen your knowledge on the WEP. 

• The Best Explanation of the Windfall Elimination Provision
• Subject to the WEP? Your Social Security Statement is Wrong! 
• How To Calculate The WEP & GPO With Mixed Earnings Under The Same Retirement Plan
• Social Security and Lump Sum Pensions: What Public Servants Should Know
• How the Government Pension Offset and Windfall Elimination Provision Affects Dually Entitled Spouses 

Also…if you haven’t already, you should join the 328,000+ subscribers on my YouTube channel!

RESOURCES:

SSA: Replacement Rates for Hypothetical Workers
https://www.ssa.gov/OACT/NOTES/ran9/an2020-9.pdf 

The Windfall Elimination Provision: It’s Time to Correct the Math
https://www.ssab.gov/research/the-windfall-elimination-provision-its-time-to-correct-the-math/ 

TOM MARGENAU: Windfall Elimination Provision should not be repealed
https://www.ncnewsonline.com/news/lifestyles/tom-margenau-windfall-elimination-provision-should-not-be-repealed/article_e6d6335a-9391-5543-a218-001ebe9d6d36.html 

Why Joe Biden Should Reform, Not Repeal, The Windfall Elimination Provision
https://www.forbes.com/sites/ebauer/2020/12/07/why-joe-biden-should-reform-not-repeal-the-windfall-elimination-provision/?sh=1b43859c9710 

Ways & Means Committee The WEP is Unfair – and Here’s Why
https://gop-waysandmeans.house.gov/wep-unfair/

Social Security: The Windfall Elimination Provision (WEP) 
https://fas.org/sgp/crs/misc/98-35.pdf