WEP’s effect on Social Security

The Windfall Elimination Provision (WEP) affects the Social Security benefits paid to anyone who is eligible for an annuity from a retirement system where he or she didn’t pay Social Security taxes.

As a result, most Civil Service Retirement System (CSRS) employees who retire and are also eligible for a Social Security benefit will have a different computational formula used to calculate that benefit. The same is true of Federal Employee Retirement System (FERS) retirees who have a CSRS component in their annuities.

If the WEP applies to you, you’ll only receive a full Social Security benefit if you have 30 or more years of substantial earnings under Social Security. If you have fewer than 30 years, your benefit will be reduced.

The rationale for this is spelled out by the Social Security Administration: “Social Security benefits replace a percentage of a worker’s pre-retirement earnings. The formula used to compute Social Security benefits includes factors that ensure that lower-paid workers get a higher percentage of return than their more well-to-do counterparts. For example, lower-paid workers could conceivably get a Social Security benefit that equals up to 90 percent of their pre-retirement earnings. Highly paid workers receive rates of return that are considerably less. (The average is about 42 percent.)

“Before the law was changed in 1983, employees who spent time in jobs not covered by Social Security had their benefits computed as if they were long-term, low-wage workers. Thus they received the advantage of the higher percentage of Social Security benefits in addition to their other pension. The modified formula eliminates this windfall.”

To understand the modified formula, you need to look at the formula that’s used to calculate the Social Security benefit of retirees who only worked in jobs covered by Social Security:

• Take 90 percent of the first $826 of average indexed monthly earnings (AIME);
• Add 32 percent of the AIME in excess of $826 up through $4,980;
• Then add 15 percent of the AIME over $4,980.

While the percentages are constant, the dollar figures are adjusted annually. The ones above apply to anyone who became eligible for a Social Security benefit in 2015.

Under the WEP, if you receive an annuity — in whole or part — from a retirement system where you didn’t pay Social Security taxes — such as CSRS — you will have that 90 percent figure reduced by 5 percent for each year of substantial earnings less than 30. The reduction ends at 40 percent if you have 20 or fewer years of “substantial earnings.”

Substantial earnings are not the same as those needed to earn Social Security credits. For example, in 2015 you would only need to have earned $4,880 to get a year’s worth of Social Security credits, but you would have had to earn $22,050 for your earnings to be considered substantial.

If you are subject to the WEP and want to find out how it would affect your Social Security benefit, go to ssa.gov/retire2/anyPiaWepjs04.htm for a handy calculator.

There are a few exceptions to the WEP. As stated earlier, it doesn’t apply to anyone entitled — in whole or part — to a CSRS annuity who has 30 years or more of substantial earnings under Social Security. Nor does it apply to any federal worker first hired after December 31, 1983, all of whom are covered by Social Security. Further, it doesn’t apply to a spouse who is entitled to both a Social Security benefit based on his or her own work record and a CSRS survivor annuity. Other than that, the exceptions apply to very limited populations, for example those retirees whose only pension comes from railroad employment.

To find out if any of the exceptions to the WEP apply to you, go to ssa.gov/pubs/10045.html to download a fact sheet.

A closing word. When it enacted WEP the Windfall Elimination Provision in 1983, Congress took away what it viewed as a disproportionate benefit: the generous treatment of retirees whose annuities came from a retirement system where they didn’t pay Social Security taxes but who had earned enough credits to be entitled to a Social Security benefit.